Confidential block trading system and method

ABSTRACT

Methods and systems for facilitating trading of securities, preferred methods comprising receiving a first buy or sell order from a first user; calculating a block price range; determining that said first order is reasonably priced; transmitting to a second user a notification that a reasonably priced order is present, but without notifying said second user of the side; receiving a second order from said second user, wherein said second order is a contra to said first order and nearly matches but does not cross said first order; transmitting a contra order notification to said second user after said second order is received, said contra order notification indicating that a nearly matching contra order is active; receiving a third order from said second user, said third order being a contra to said first order and crossing said first order; and executing a trade comprising said first order and said third order.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application is a continuation of U.S. patent application Ser. No.12/692,147, filed Jan. 22, 2010, which is a continuation of U.S. patentapplication Ser. No. 10/603,100, filed Jun. 24, 2003, now U.S. Pat. No.7,685,052 issued Mar. 23, 2010, which is a continuation-in-part of U.S.patent application Ser. No. 09/870,845, filed May 31, 2001, now U.S.Pat. No. 7,428,506, issued Sep. 23, 2008, which is acontinuation-in-part of U.S. patent application Ser. No. 09/750,768,filed Dec. 29, 2000, now U.S. Pat. No. 8,010,438, dated Aug. 30, 2011,which is a continuation-in-part of U.S. patent application Ser. No.09/585,049, filed Jun. 1, 2000, now U.S. Pat. No. 7,356,500, issued Apr.8, 2008. The entire contents of each of the above listed applicationsare incorporated herein by reference.

FIELD OF THE INVENTION

The subject invention relates to a method for managing information tofocus block-trading interests into a confidential crossing book, andexecuting block trades over a computer network such as the Internet.

BACKGROUND

In public securities markets, market mechanics and trading psychologycreate barriers to efficient information dissemination and pricediscovery. A market participant's decision to reveal informationregarding a large trading interest typically represents a tradeoffbetween confidentiality and liquidity. As used herein, the term “marketparticipant” refers to any person or firm with the ability to tradesecurities; examples of market participants include broker-dealers,institutions, hedge funds, statistical arbitrage and other proprietarytrading operations, and private investors trading on electroniccommunication networks (ECNs).

By publicly revealing the details of a significant active buyinginterest, for example, a market participant assumes the risk of adverseprice action—other traders may view his buying interest as an indicationthat the stock is worth more than its current price. Other marketparticipants that had legitimate selling interests, and market makersthat seek short term trading profits, will “fade” their offers (becomeless aggressive sellers), resulting in an increase in the market price.There is also an empirically demonstrable risk of adverse price actiondue to “front running” (buying activity by other market participants inanticipation of price movement resulting from the large revealed order).

Confidentiality can be maintained to some degree by slicing the largeorder up into many small pieces to avoid arousing interest, but thisprocess either fails to fill the order quickly when the trader is mostcareful to hide its existence, or if when it is worked at a faster rate,information about the existence of the order leaks out leading to muchthe same effect as the above mentioned order display problem.

In either case, an economically efficient transaction is missed becausethe trading costs associated with disseminating information are toohigh.

Trading large blocks on the New York Stock Exchange floor is alsohindered by rules designed to protect the interests of floor brokersrepresenting short term trading interests, and the proprietary tradinginterests of the specialists themselves. Floor brokers can participatewith an Institutional order, taking an equal portion of the liquiditycoming in on the contra side, to take a short term speculative positionwith the safety net provided by the larger Institutional order; or“penny jump” on the Institutional order by intercepting the contra-sideliquidity with a one-cent better price, rather than allow it to fill theInstitutional order. Specialists utilize various methods including pennyjumping to extract profits from information about Institutionalactivity; invariably these activities lead to adverse price movementsand lower fill rates for the Institutional orders.

Another known difficulty with trading large blocks is one that issometimes called the “buyer's remorse” problem. When a trader places alarge block and gets it filled quickly, the trader's natural reaction isto believe that the easy fill indicates that it was a poor tradingdecision—either there was a much larger contra whose residue willsubsequently drive the price adversely, or the block's price was tooattractive, leading to its quick acceptance. This “buyer's remorse”effect leaves the client unsatisfied and unlikely to place similarorders through this same channel in the future, since the quick fillwould be perceived as a failure of this channel to provide protectionfrom a poor trade.

One known approach to matching trading interests and executing blocktrades while limiting information dissemination is employed by thePOSIT® matching system. The POSIT® system allows trading interests toaccumulate and initiates a matching sequence at set intervals. Marketparticipants place confidential orders in the system and are unaware ofthe amount or aggressiveness of other orders on the same side or on thecontra side until the matching is released. This approach does notprovide for any mechanism to notify traders that may have nearlymatching prices but overlapping order quantities that they could achievea trade with only a small change in their price. Also, by being a blackbox it fails to provide information that would indicate to traders thatthere is liquidity in the system in particular securities, so that theywould know to pull back orders they may have placed elsewhere in orderto participate in the POSIT® match. This approach further fails toenable the broadcast of information based on the activity in the systemthat may entice traders to enter orders when the system's participantshave a higher than usual interest in a given security, this being anindication that the fill rates could then be expected to be higher. Italso fails to provide the ability for a participant to initiatetransactions at a time of his or her choosing. By pricing all trades atthe midpoint, it also fails to provide any mechanism wherein a patienttrader with a moderately sized block could draw a better price from amuch larger or more anxious block order that would tend to drive theprice adversely. Finally, it does not offer any ability for marketparticipants to negotiate or otherwise actively participate in priceformation through a process that could lead to the discovery of a fairprice for a block trade.

Another system that attempts to manage information to facilitate largeblock trades is the LiquidNet Trading System. Users of this systemcontribute data regarding their trading interests directly from theirOrder Management Systems. When a user indicates an interest that matchescontra interests already expressed within the system, all matched usersreceive an invitation to enter a negotiation session. If this invitationis accepted, the trader is expected to be firm and negotiate in goodfaith towards a trade; those that play with the system but fail tonegotiate in good faith and close trades are expelled from the system.In the LiquidNet system, traders learn the existence of counterinterests before anyone has entered negotiations; while this leakage isuseful to entice traders to enter a negotiation process, it also leaksinformation about orders in the participants' Order Management Systemsto parties that may or may not have a firm intention to trade. Thesystem therefore relies on “fair play” by members of the network, whichlimits participation to a country club of like-minded Institutions. Thisfails to provide a system where the side of a trading interest can onlybe revealed to parties that have a firm, electronically executablecontra order within the system at a reasonable price, and through thisrule permits the participation of parties that have different incentivesand trading horizons, including sell-side firms and hedge funds. TheLiquidNet information management model, by leaking information regardingthe side of a participant's order without a firm liability to trade,fails to achieve a proper balance between the need for confidentialityand the need to share some information in order to focus block interestin time, as can be achieved through means that indicate to traders thatthere is trading interest within the system without revealing the sideof said interest until a trader has been exposed to a firm liability totrade. It also fails to provide the protection from gaming that can beachieved by a block crossing system wherein the only means to discoverthe side of a second participant's order is to place an aggressivelypriced large block order, which would then have a significantprobability of being executed. By allowing orders of all sizes, theLiquidNet system also fails to provide a solution to the buyer's remorseproblem, wherein a buyer that has a large order completely filled withgreat ease later fears that the contra had a much larger sell orderwhose residue is likely to drive the price down.

Harborside Plus offers another system to facilitate the crossing ofblocks based on the management of trading interest information. In theHarborside system, traders are asked to send indications of interestinto their database when they have an interest in buying or selling atleast 25,000 shares of stock at the current midpoint price. Theseindications of interest are stored electronically and expire after acertain number of minutes, which depends on the client's trading style(for example, hedge funds or brokers tend to trade quickly so theirindications will expire after only a few minutes). When there is an IOIon both sides in the security, a sales trader is notified through apopup window and will proceed to call the customers to close a trade.The mediation of a human trader is intended to ensure that the system isnot abused by traders that would enter an IOI when in fact they do nothave an interest to trade, since the damage to the relationship wouldmake it less likely that this trader would get called again in thefuture. This system does not anticipate a trading system wherein fairplay is enforced automatically by requiring traders to enter firm,electronically executable orders, that could either execute on arrivalor be exposed to an execution from another party resident within such asystem before the owner of said order receives any information backabout other traders' interests. It also fails to provide any means forautomating the negotiation process that is carried out by the salestrader. Since a sales trader is involved, it fails to provide theanonymity that traders expect from a computer system, where traders areenabled to negotiate directly with each other without leakinginformation to a third human being who may or may not be fully trusted.Finally, the Harborside system fails to anticipate mechanisms to enticeother traders to express their trading interest in a security when thereis evidence of trading interest on one side only. Finally, it fails toanticipate the possibility of showing information about one-sidedtrading interests without revealing the side, for the purpose offocusing interest in the security at this time without leakingprice-impacting information to parties that have not expressed a firmliability to trade.

A fourth example of a system that attempts to manage information tofacilitate block trades is the Liquidity Tracker facility, deployed bythe Nasdaq Stock Market and subject of co-pending U.S. patentapplication Ser. No. 09/870,845, the entire contents of which areincorporated herein by reference. Liquidity Tracker enables a user toenter a firm order to trade and show information about this order tolikely counter-parties. In the Liquidity Tracker system, thecounter-parties are identified using real-time access to clearinginformation that Nasdaq participants submit through the AutomatedConfirmation and Transaction (ACT) system. By selectively targetinglikely contra parties only, the intention is to avoid leakinginformation to other traders that could front run on the Institutionalorder or otherwise misuse this information for short term tradingprofit. However, since the Liquidity Tracker system only selects contraparties, the recipients will know if the first participant was a buyeror seller, i.e. the side of the order entry participant is not keptconfidential. Some recipients of this information may be induced to stopor even reverse their trading direction instead of accepting the order,in the hope of seeing a better price later. While the level ofconfidentiality provided by the selection of targets is appropriate forsomewhat larger orders than those that could be displayed on a publicbook, there are instances where traders with larger institutional blockswill feel uncomfortable with this level of confidentiality.

In this environment, there is an acute need for a confidential crossingsystem that enables users to place an order that will not be shown toanyone, but will nevertheless cause an information event that can helpbring traders together at the same time in the same security.

In order to be productive rather than destructive, information events ina trade negotiation process should avoid two problems:

-   -   1. The preference revelation problem. Once a trader has        displayed an interest to buy (sell) a fungible item, other        participants that see this interest will increase (decrease) the        value that they were placing on this item. In equity trading,        showing a large buy (sell) order leads others to revise and        perhaps cancel their intent to take a contra position. On the        other hand, by not expressing a preference one misses the        opportunity to trade altogether.    -   2. The buyer's remorse problem. When purchasing a fungible item,        when the deal is closed with greater ease than expected, the        buyer tends to assume that it was likely too good a deal for the        other party. In the context of equity trading, when a large        block order gets completely filled the trader would assume that        the contra party's order was even larger and its residue would        subsequently affect the price adversely as it gets worked in the        marketplace. This problem is particularly acute for a system        that caters to large Institutions.

SUMMARY

The systems and methods of the present invention provide novel solutionsto the above-mentioned problems of institutional block crossing.

A preferred embodiment of the system limits the revelation of tradingpreferences by not showing the side on which one intends to trade untilthe final steps of a negotiation. Upon entry of a reasonably pricedorder, the system sets the symbol in an “active” state. This indicatesto other participants that an order has been entered in this security,but without revealing whether it was a buy or a sell order.

In the preferred embodiment the system determines prices to be“reasonable” if they are at least as aggressive as the passive end of aBlock Price Range (BPR). The BPR is calculated based on the currentmarket prices, recent volatility in the symbol, and liquidity, and shownto the trader on a Graphic User Interface (GUI). In the preferredembodiment the BPR is calculated by predicting the price range that oneis likely to see in the next 60 seconds, and this range is re-calculatedat 60-second intervals. In an alternate embodiment a “reasonable” priceis deemed to be one that is within a given number of cents (or fractionsthereof) from the National Best Bid or Offer, for buy or sell ordersrespectively, on the time of order entry.

A second participant who sees the symbol active flag and has an interestin trading the same security can elect to enter an order. If it is onthe contra side and is sufficiently aggressive in price to cross thefirst participant's order, the trade is executed at the firstparticipant's limit.

The buyer's remorse problem is addressed by requiring all traders toenter orders only in multiples of a large block quantity. This quantityis chosen to be somewhat larger than the typical size of orders usuallysent to broker-dealers. For the most liquid securities, for example, thesystem can be configured to use a large block quantity of 100,000shares. As a result, it will be the traders' expectation that mostorders in the system are for one unit of this large block quantity only.As a result, when a trader receives a complete fill on a 100,000 shareorder this does not indicate in any way that the contra's order in thesystem should be expected to be larger—most likely it is also a 100,000share order and the complete fill is only a reflection of the system'smandated large block size. In an alternate embodiment, orders can onlybe entered for this large block quantity and there is never a residueafter a fill. In yet another alternate embodiment, the traders furthercommit to not trade on the market for 30 minutes after a trade is done,and agree to enable random audits to verify that the voluntaryrestriction is respected, or when verification is deemed to benecessary.

Having reduced the likelihood of buyer's remorse, it is then possible toallow traders to know by means of a “contra present” flag when there isa nearly matching contra order within the system. Since the sizes of thetwo orders are likely the same, the information about the presence ofmatching orders on both sides does not point to any adverse pricemovement in the near future: if both traders canceled out of the matchthey would each be trading on the regular market and their respectivetrades would balance each other out with no net price impact. Therefore,the information that there are contras present is consistent with anassumption that the current market price is a fair price to close a dealon a large block. To avoid the possibility that some traders may enteran order on an active symbol only to see the contras present flag andthen immediately cancel, the system described in the preferredembodiment lets resident orders see the contras present flag immediatelyas soon as a contra order is entered, but delays showing the flag to thesecond participant that entered the contra order and shows this flagonly after 30 seconds if the contras present situation persists. Thisgives the resident order a 30-second time window to either execute thenewly entered order by increasing the price aggression, or cancel his orher order before its existence is revealed to the second participant.The first mover advantage to the resident order provides an incentive toenter orders that will set the symbol status to “active”, therebyenhancing the liquidity in the system, which in turn will draw othertraders that have an interest in taking said liquidity.

In a preferred embodiment, traders may enter orders at any price but theactive symbol and contra present flags are only issued based upon ordersthat are priced within a system-announced “Block Price Range.” The BlockPrice Range is determined based upon the National Market Best Bid andOffer and the stock's recent volatility, with the intention to provideguidance on a range of prices within which one would be most likely toexecute a large block trade. For example, the Block Price Range cansimply be taken to be the range from the National Best Bid minus 5 centsto the National Best Offer plus 5 cents. If all traders know the currentBPR, they know that entering an order within this range will cause theactive symbol flag to be displayed to participants. A second participantwho sees the active symbol flag and would like to buy a large block ofstock can then enter a buy order at the Block Offer (top of the BPR); ifthe first order that caused the active symbol flag to be posted is stillopen and was a sell order, the second participant would then have thecertainty of a fill. Conversely, if such an aggressive buy order did notfill, the second participant would know that either the first order hadbeen canceled or it was also a buy order. If the second participantinstead entered a passive order—for example, an order to buy at theBlock Bid—then that order would most likely not get filled on arrivaleven in the case where the first participant was a seller. Instead, thefirst participant would see a “contras present” message and may elect tolower his or her price to lock in the trade. If the first participanttakes no such action, after 30 seconds the second participant wouldlearn that the first participant's order that caused the active symbolflag was in fact a passive seller, and may elect to increase his or herprice to meet at a reasonable price in-between. As long as bothparticipants are seeing the contras present flag, they can modify theirprices until a trade gets done; the more anxious trader will be morelikely to raise the price aggression level more quickly, leading to anatural price discovery process even in the absence of any displayedprices other than the BPR guideline.

In the preferred embodiment, the traders in a contras-present situationdo not receive information about the price movements of theircounterparties; they are simply expected to price their orders at whatthey consider a fair price and hope that the other party will do thesame. In an alternate embodiment, the traders see that the contra partyhas increased or reduced their price aggression and may use thisinformation to determine that it is worth similarly raising their ownprice aggression level. If each trader does this in turn by a minimum1-cent (or other pre-set) interval the two will meet approximately halfway between the original buy and sell prices.

A schematic view of a preferred computer system embodiment of thepresent invention is given in FIG. 1.

The system preferably comprises a trade facilitation system 100 (alsoreferred to herein as Cloud9). Said trade facilitation system 100 isconnected to participants through a communication network 80 such as theInternet, and a financial information exchange network such as a FIXNetwork 90. System 100 receives market data from a vendor 60 through thevendor's network 70. Participants access the system through a graphicuser interface (GUI) 20 installed at each participant's workstation.Orders are routed to an Execution Engine 50. Matching orders are tradedautomatically when received by said Execution Engine. Cloud9 comprises aNet Server subsystem 110 responsible for connectivity to each clientGUI; a Financial Information Exchange (FIX) Server 120 to provideconnectivity to back-office systems and client order management systems;and an Order Manager subsystem 130 responsible for implementing theorder handling logic of the system as described herein. Facilitatormodule 140 creates information events intended to focus interest andsteer users toward a trade. The trade facilitation system 100 keepstrack of the status of its orders in a transactional database 150. Theprice aggression of orders is evaluated with respect to a Block PriceRange, which is computed by an Analytics Server 160: the price of anorder can be (a) more passive than the BPR, or (b) aggressive, meaningthat the price is either within the BPR or more aggressive than the BPR.The Execution Engine 50 receives orders through the CommunicationsNetwork 80 and electronically stores them in a transactional, faulttolerant database (the Book 51); it reports executions back to the tradefacilitation system 100 over this same network. In an alternateembodiment, the Execution Engine 50 can be hosted locally as anadditional component within the Cloud9 system 100.

Participants use a graphic user interface 20 to enter orders into thesystem. When said order is executed, the results are reported forprocessing to their sponsoring broker 95 and to their own firm's OrderManagement Systems (OMS) 10 using the FIX protocol.

All orders are preferably required to be “Large Block Orders” whichmeans their size must be a multiple of a large block quantity. Forexample, if the Large Block Quantity were 100,000 the GUI only allowsorders that are a multiple of 100,000 shares. The orders can be Limit orbetter, or pegged to a market indicator such as the midpoint between thebest bid and offer on the National Market. All validated block ordersare immediately routed to the Execution Engine 50, where they are storedin the Book 51. In an alternate embodiment, orders of any size areaccepted.

Both Cloud9 and the Execution Engine 50 preferably process orders on afirst come first served basis.

The GUI 20 enables a trader who has an interest in trading a large blockin a given security to click on the security's symbol as displayed in abox on top of the main screen, to bring up an order entry dialog andautomatically populate the fields of the order entry dialog inaccordance with his or her pre-configured preferences. The trader willedit these fields as needed and press a button marked “Submit” to placethe order.

If a newly entered order matches a prior book order (the new order is inthe same security, on the opposite side, and with a price that equals orbetters a standing book order), the Execution Engine 50 automaticallyexecutes a trade at the price of the standing order, and electronicallyreports the trade to the Automated Confirmation and Transaction (ACT) 40service for the consolidated tape, and to the sponsoring broker'sclearing firm 30. Notice of the execution is also sent to the graphicuser interface 20 to notify the trader of the trade. If on the otherhand there is no matching order in the book, the new order remainsstored in the book as a standing order. In a preferred embodimentclients can elect to have their orders sponsored by a third partybroker, in which case the trades are also reported to the sponsoringbroker's back-office systems 95 via FIX.

In order to increase the likelihood of trades, the system's OrderManager 130 is connected to a facilitator module 140, whichautomatically takes action when a newly-entered order does not find amatch but is stored in the book 51 as a standing order. In a preferredembodiment, only orders that are reasonably priced are subject tofacilitation; a reasonable price range for trading large blocks (theBlock Price Range) is computed by the Analytics Server 160 and posted onthe graphic user interfaces 20 of traders with an update every 60seconds. The purpose of the facilitator 140 is to generate informationevents that will encourage others to enter orders in the same security,without leaking the price or side of the order.

In a preferred embodiment, there are two possible action flows when thefacilitator 140 is called into action, depending on the state of theorders as known within the system's database 150.

In the first case, when a newly entered order does not find a match, thestate of the system is such that there are no reasonably priced contraorders within the system. A message is delivered to all parties thatsubscribe to this security, indicating that the symbol subject of thenewly entered order is now “active” within the system (if it was alreadyactive, this step is omitted). The graphic user interface 20 willdisplay active symbols in an orange-colored box 215 above the orderentry dialog 205, as illustrated in FIG. 2. The system preferablyenables a second participant who sees an active symbol and has aninterest in trading a large block in this security to bring up an orderentry dialog by clicking on the symbol. The system preferably populatesall the fields of the order entry dialog 205 in accordance with thesecond participant's pre-configured preferences. The second participantis acting with the knowledge that the symbol is “active.” Therefore, hewill understand that a first order was previously entered that causedthe symbol to become active, and this first order was priced within theBPR. Taking advantage of this information, the second participant mightelect to submit a limit buy (sell) order at the block offer (block bid),to essentially guarantee a trade if the first order was on the contraside and is still open. In a preferred embodiment, once a symbol hasbecome active it will stay active for at least 60 seconds; the symbolactivity state is reviewed in conjunction with BPR updates and out toinactive only if it has been active for more than 60 seconds and thereare no more reasonably-priced orders currently open within the system atthe time scheduled for a BPR update. In an alternate embodiment thesymbol's activity status is updated in real time to reflect whether ornot there is a reasonably priced order within the system at this time.In another alternate embodiment, in addition to the color the GUIdisplays the number of reasonably priced orders that are currently openwithin the system.

In the second case, the state of the system is such that there isalready a reasonably priced order on the contra side, but it's not quiteaggressive enough to meet the limit price offered by the newly enteredorder. In this case, the facilitator module 140 will immediately send amessage to all participants with reasonably priced standing contraorders to let them know that there is now a reasonably priced contraorder present within the system. The graphic user interface 20 displaysthe “Contras Present” message by highlighting the symbol in ayellow-colored box 225 above the order entry dialog 205, as shown inFIG. 2. The first participant, who caused the symbol to be active, willtherefore see that there is now a contra present. The system preferablyenables said first participant to re-price the order at an aggressiveprice and replace the order so as to execute the second participant'sorder. In a preferred embodiment the system automatically proposes theaggressive end of the BPR as the default price to encourage a strategythat will result in a trade; the trader can then modify the orderparameters as desired. In an alternate embodiment the system enablesusers to configure an aggressive order type to be limited to the betterof the BPR or a configurable number of cents (or fractions thereof) fromthe current National Market Midpoint price, and this aggressive ordertype is then the one that is proposed as the default in a contraspresent situation. In a preferred embodiment the user is allowed toenter an order that will cause the system to attempt to execute thecontra's order by means of clicking on the yellow box with the symboland then pressing a single button labeled for this purpose. In analternate embodiment the user interface 20 lets the trader select a newprice and press a button marked “Replace.” If none of the traders withstanding orders raise their price aggression, and there are stillstanding contra orders after 30 seconds, the second participant thatoriginated the contra order will preferably also learn that there arestanding contra orders within the system. The system preferably displaysthis information by means of a yellow box, as described previously forthe first participant; and said second participant may elect to increasehis or her price aggression to close a trade. The 30-second delay isintended to discourage traders from probing the system to discoverwhether contras are present, and then attempting to cancel immediatelythereafter. This safety mechanism is effective to the extent that theBPR is not too far removed from the current market, so that during the30-second interval the newly entered order faces a real chance of beingexecuted by one of the traders with a standing order. In an alternateembodiment there is no 30-second delay and all traders aresimultaneously informed of the contras present situation, but there is a5-second minimum time in force during which orders may not be canceled.In another alternate embodiment all users receive the contras presentmessage immediately and there is no minimum time in force condition. Inan alternate embodiment traders may configure the GUI 20 toautomatically replace their order with an aggressive price when acontras present situation arises. In this last embodiment if there aremultiple orders within the system with automatic re-pricing instructionsand competing to execute the same contra order, the system executesorders in price-time priority: standing orders compete on price first tofill the incoming contra order, then if two orders have the sameaggressive price limit, on time of entry, with priority going to thefirst order entered.

A preferred algorithm to calculate the Block Price Range (BPR) seeks todetermine reasonable prices for trading a large block order within thenext 60 seconds, depending on the volatility of the stock. In thepreferred embodiment, this range is based upon the prices at whichtrades have been reported to the consolidated tape since the last timethe BPR was updated, taking a symmetric price range up and down from thecurrent midpoint of the National best bid and offer. This range extendsup and down from the midpoint by an amount that is directly related tothe observed price volatility since the most recent BPR update.

Acronyms Acronym In extenso Description ACT Automated Confirmation andNasdaq facility allowing the Transaction service real time comparison oftrades and forwarding of clearing information to the Depository Trustand Clearing Corporation (DTCC). API Application Programming Enablesthird party Interface developers to create a front- end softwareapplication that will connect to the system and allow it to be accessedby remote users. BlockLink System subject of a related application whichenables users to facilitate block trades by sending invitations to tradeto likely contra parties. BPR Block Price Range A price range that isdeemed to be reasonable for the purpose of affecting a large blocktrade. Enum Enumeration Term used to denote a data type in an electronicinformation storage facility, wherein the possible values taken areamong an enumerated list. FCM Fidelity Capital Markets Example of apossible sponsoring broker for the system subject of the presentinvention. FIX Financial Information Standard protocol used in theExchange protocol financial markets for communicating order and tradeinformation. GUI Graphic User interface Front end application intendedto enable access to the system subject of the present invention. INTInteger Usually refers to a data type in an electronic informationstorage facility IOC Immediate Or Cancel Attribute of an orderindicating that the order should be canceled if it cannot be filledimmediately. IOI Indication Of Interest Message used in the financialmarkets to indicate interest in purchasing or selling a security. LBQLarge Block Quantity A standardized order size per symbol used in thesystem subject of the present invention to increase the chance thatorders will match. LQT Liquidity Tracker Nasdaq facility subject of arelated application referenced herein. MID Midpoint Price that is at anequal distance from the Best Bid and the Best Offer on the NationalMarket. MPID Market Participant ID 4-letter acronym used to identify abroker dealer on the Nasdaq stock market. NotHeld Attribute of an ordergiving the broker discretion to handle this order without theconstraints of order display and handling rules pertaining to heldorders. OATS Order Audit Trail System System operated by the NationalAssociation for Securities Dealers for the purpose of market regulation.OMS Order Management System Computer system allowing firms to keep trackof the status of orders, portion that is filled or being worked, etc.Peg Order attribute indicating that the limit price is to be calculatedat the moment of a match opportunity in reference to the NationalMarket. PegOffset Order attribute giving the number of cents to be addedto the pegged price. Q/A Quality Assurance Part of the softwaredevelopment process. Ticket Message sent from an Order Management Systemto a broker or trading system, to indicate an intent to trade a certainnumber of shares through this broker or trading system. TIF Time InForce Attribute of an order indicating the time duration of the order'svalidity.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a schematic view of a preferred computer system embodiment ofthe present invention.

FIG. 2 depicts a preferred GUI wherein an order entry dialog is open.

FIGS. 3(a) & 3(b) depicts operation of a preferred system and method,including interaction of the system with electronic systems ofparticipants and related firms.

FIG. 4 shows the life cycle of a trade from the clearing perspective, ina preferred embodiment.

FIG. 5 depicts steps preferably executed while processing a New Ticket.

FIG. 6 depicts preferred steps for processes a Cancel Ticket message.

FIG. 7 depicts preferred steps for processing valid orders.

FIG. 8 depicts a preferred watch list configuration dialog.

FIG. 9 depicts steps of s preferred method for calculating BPR.

FIG. 10 depicts a preferred GUI wherein watched securities areidentified.

DETAILED DESCRIPTION OF PREFERRED EMBODIMENTS

The following is a functional description of preferred and alternateembodiments of the subject invention.

Key features. Below is a preferred list of features of the subjectinvention:

-   -   1. Confidential crossing of blocks. Orders are routed to a        matching engine that will cross orders with price time priority        and report locked-in trades for clearing. The matching engine        can be remotely hosted,    -   2. Large Block Quantity. All orders must be entered in a        multiple of a large block quantity configured per security. The        large block size deters gaming and mitigates the “buyer's        remorse” problem, or fear of being on the wrong side following a        complete fill, by encouraging users to use the same order        quantity.    -   3. Active Symbol Flag. The system will push active symbol alerts        when it determines that there is block interest on both sides of        a security. This will focus order entry in a narrow time window        and thereby increase the fill probability.    -   4. Contras Present Flag. Traders with a reasonably priced order        in the system will be alerted when a nearly matching contra        order is entered. 30 seconds later, the participant with the new        order is also alerted of the presence of a near match. The        contras present flag focuses orders in price to maximize the        probability of a trade.    -   5. FIX Connectivity to Back-office. Cloud9 supports mechanisms        to deliver FIX executions to a Buyside Order Management System        either directly or through a FIX Service bureau. Supports end of        day anonymity for the buy-side client with respect to the        sponsoring broker.    -   6. FIX Ticketing application. Clients can place shares from        their Order Management System to Cloud9 (symbol, quantity and        side), then work up to the placed quantity using the GUI 20. The        OMS can be updated to keep track of individual working orders,        or only upon a fill, depending on the client's configuration,    -   7. API/GUI Access. Cloud9 may provide a house-branded trading        front-end designed with input from institutional traders, that        prominently displays the active symbols for a watch list of        securities of interest, and prompts the trader to close a trade        when the contras present flag is set. The API may also be        published to enable approved third parties to build access from        their own front ends.

The invention comprises a preferred architecture for integrating thesystem with the electronic systems of participants and related firmssuch as the sponsoring brokers or their clearing firms. An overview ofthis integration is represented in FIGS. 3(a) & 3(b). These figuresillustrate the flow leading to a trade between participants C and E,described below. With standing orders already in the system, a newparticipant enters a contra order. The system sends out the contrapresent flag; participant modifies the standing order to a higher priceaggression level, resulting in an executed trade.

The system preferably facilitates the trade in the above example throughthe following steps:

-   -   1. In step 1 a user enters an order into the system, preferably        using a Graphic User Interface 20.    -   2. The system preferably assigns a broker of record in step 2        and validates the order against any credit limits based on the        broker of record and customer ID. The order information is        stored in a database 150.    -   3. In step 3 the Order Manager 130 routes the order to the        execution engine 50, and expects an order update message back        from the execution engine indicating whether the order was        filled on entry, stored as a valid limit order, or canceled if        the order was invalid.    -   4. Upon finding that the order did not execute or cancel in the        execution engine, the OM 130 notifies the Facilitator Module 140        of the order entry event,    -   5. The Facilitator Module 140 finds that there was a contra        present in the system; it sends the resident contra the “contra        present” message immediately and schedules an event to release        this same message to the trader that just entered the new order        after a 30-second delay.    -   6. In step 6 the contra present message is delivered to the        resident order. This is preferably done immediately. In an        alternate embodiment the contras present flag is sent after a        10-second delay, to give the second participant time to try a        more aggressive price before leaking information about the        order.    -   7. Step 7 preferably occurs 30 seconds after the first contras        present message was sent: the contra present message will be        delivered to the new order, if the contra present situation        persists.    -   In step 8, the resident order, a sponsored customer using a        service bureau for their FIX connectivity to the system,        receives the contra present flag on their GUI 200 and modifies        the order to increase price aggression.    -   9. In step 9, the OM 130 routes the modify order request and        updates the state of the order in the OM database 150.    -   10. In step 10 the OM 130 passes the modify order message to the        execution engine 50.    -   11. In step 11 the execution engine 50 determines that the new        price aggression is sufficient to lock in a trade and preferably        reports this trade to ACT with the clearing counter-party        information. In an alternate embodiment the trade is reported        for tape only and the clearing information is withheld until end        of day to delay the time when sponsoring brokers are notified of        the trade.    -   12. The execution engine 50 preferably reports the execution to        the Order Manager 130; OM 130 updates the state of the order in        its database 150 and updates the credit consumed.    -   13. In step 13 the Order Manager 130 reports the trade to Net        Server 110 and to FIX server 120.    -   14. Net Server 110 and FIX Server 120 forward the execution        message to their respective clients.    -   15. The second client receives the FIX executions through the        service bureau.    -   16. In the last step of the trading process a drop copy of the        execution is sent to the sponsoring broker(s). In the preferred        embodiment this is done at the end of day; in an alternate        embodiment it is done immediately and the sponsoring brokers are        directly informed of all trading activity they sponsor.

Facilities

The system preferably comprises the following facilities or subsystems:

-   -   1. NetServer 110. The NetServer subsystem enables clients to        access the system through a Graphic User Interface 200. This is        preferably the only interface that can be used to enter orders        into the system. All users must either download the trading        application (GUI), or develop a GUI that provides satisfactory        visibility to the active symbol and contra present flags. Net        Server 110 preferably supports connectivity to the trader front        end via a published API.    -   2. FIX Server 120. The FIX Server is a computer system that        allows clients to connect for the purpose of exchanging        financial information messages according to the FIX protocol;        source code for a FIX server is available in open source code        libraries. The Cloud9 FIX Server preferably is configured to        receive Tickets (New, Cancel, Cancel/Replace) and order status        request messages. It will push out Executions including order        updates and fills. It preferably supports direct connections        with client Order Management Systems, as well as connections        through a service bureau. The FIX Server may also be used to        deliver execution messages (with “done” status) to a sponsoring        broker to set up after trade processing. Normally these messages        will be issued at the end of the day, but clients preferably can        also request the system to notify their broker of executions        intra-day if needed.    -   Order Manager 130. The Cloud9 Order Manager processes orders and        subsequent trading messages, passing them to the execution        engine for storage and execution. It preferably receives BPR        update messages from the Analytics Server 160 and maintains the        price aggression flag on its orders, by keeping track of when        the order is priced at least as good as the BPR, or Passively        priced.    -   4. Facilitator Module 140. The order manager 130 preferably        comprises a component in charge of facilitating the entry of        matching orders into the system by carefully releasing        information about orders, as described herein.    -   5. Order Management Database 150. The order manager 130        preferably keeps track of the state of the orders in a        transactional and fully recoverable Structured Query Language        (SQL) database. It also contains reporting modules responsible        for reporting the trades to clearing as well as for generating        daily mandatory reports to the corresponding Self Regulatory        Organization (SRO).    -   6 Analytics Server 160. The analytics server 160 receives a data        feed that informs said server of the market activity state per        symbol (start, stop, trading halts), the inside best bid and        offer for all Nasdaq and NYSE listed stocks (price, aggregate        size and timestamp) and the last sale trade data from the        National Market System consolidated tape. The server will        preferably store this information into a data cache and carry        out analytical calculations to determine the Block Price Range.        It is responsible for publishing to subscribing parties, per        symbol, inside quote price changes, BPR update messages, and        trading halts.    -   7. Help Desk. The system preferably comprises a Help Desk        subsystem, which comprises a user interface such as a web GUI.        Help desk operators can access this interface to        add/remove/modify client firms, sponsoring brokers, or GUI        accounts that are associated with individual traders. The help        desk enables trading operations personnel to query the system        based on an order ID or by firm and symbol, to trace the        sequence of events that follow a client's order entry into the        system and give traders that wish to call the help desk a        detailed response on the history of their orders through the        system    -   8. Systems Operations Management. The system preferably also        comprises a systems operations console subsystem enabling a        system operator to manage the functional implementation of all        Cloud9 facilities. Besides the common system operations duties,        the system preferably also enables operators to carry out other        duties including: security; auditing; managing batch processes        for end-of-day and begin-of-day events; capacity planning; and        managing the entitlements for internal accounts (operator and        Help Desk).    -   9. Matching Engine 50. The Matching Engine 50 can be an        Electronic Communications Network, or a third party electronic        trading book such as Nasdaq's SuperMontage facility. In an        alternate embodiment the system itself comprises a matching        engine as a separate component within the Cloud9 system.

Preferred implementations of the above features are described moreextensively below.

FIX Server.

Cloud9 preferably uses the FIX protocol for back-office integration withthe client Order Management Systems 10 and the sponsoring brokers whenneeded. FIG. 4 shows the life cycle of a trade from the clearingperspective. The clients are preferably able to choose between twomodels for using the system. The first model uses tickets to facilitatemanaging liability across multiple market destinations. Tickets areplacements from the client's order management system that helps traderskeep a tab on how many shares they are doing in each market destination(a market destination is a place where one can execute orders, such asthe present system). The purpose of the ticket is to ensure that theaggregate number of shares placed across all destinations will neverexceed the total number of shares of the client's overall order, asknown to the client's Order Management System 10. When a trader usestickets, the tickets that have been entered from the OMS appear on theGUI 20 and orders can only be entered against these tickets.

The client that elects to use tickets preferably will only be able toenter an order into the system if said order is in the same security, onthe same side, and of a size not greater than a previously-enteredticket. The system preferably updates back-office and third-partysystems by performing the following steps when traders elect to usetickets.

-   -   1. In step 410 a ticket is entered into the system 100 as a FIX        Order with no price. The ticket carries a terminal ID that the        system maps to a particular GUI. The trader sees the ticket show        up on his/her GUI.    -   2. In step 420 a trader enters an order against this ticket,        which we will refer to herein as a “child” order. This child        order is in the same security and side as the ticket, and for a        quantity that is chosen to be the lesser of a trader-configured        default order quantity or the ticket quantity. The system        preferably validates the order and passes it to the execution        engine. In the preferred embodiment the order entry events are        reported to the OMS via FIX Execution messages with Order        Status=New. In an alternate embodiment the client OMS will only        receive Execution messages when the trade is completed (see        below).    -   3. When a trade occurs against this order, the execution engine        preferably reports to ACT for tape and clearing (step 430); then        notifies Cloud9 of the trade. In the preferred embodiment the        Cloud9 system then notifies both the GUI via API and the        clients' Order Management Systems via FIX.    -   4. The system preferably enables the trader to initiate the        allocation process before the end of the trading day (step 440        is executed at user's option). To obtain intra-day anonymity,        the sponsoring broker is preferably not notified of the trade        until the end of day, but the allocation process cannot be        completed without notifying the sponsoring broker of the trade.        To support end-of-day allocations, the GUI preferably enables        the trader to first click a button to request that the system        report the trade to the sponsoring broker. This will prime the        sponsoring broker's systems for the allocation process. In an        alternate embodiment the sponsoring broker is informed        immediately of each trade via a FIX Execution message.    -   5. In step 450 the system preferably sends a FIX Execution        message to the executing broker, including the Client-ID.    -   6. The preferred system carries out the following (step 460) at        the end of day.        -   a. A FIX Execution message is sent to the executing broker,            including the Cliend-ID. This may duplicate a similar            message if it was already sent in step 450.        -   b. A trade summary file is sent to the sponsoring broker's            clearing firm. This contains the information pertinent to            clearing, including the symbol, shares bought or sold, and            contra party's MPID.        -   c. OATS reports give a summary of the order trail and            executions on behalf of the sponsoring broker. The system            automatically sends the OATS reports to the sponsoring            broker(s) for forwarding to the NASD. In an alternate            embodiment it sends the report directly to the NASD. These            file transfers are electronic and utilize the File Transfer            Protocol (FTP).

In the preferred embodiment users are enabled to select an alternateconfiguration that does not require the use of tickets, but insteadallows traders to start the process at the order entry step 420. Theremaining flow is the same as described above.

In an alternate embodiment, the system 100 is hosted by the sponsoringbroker for all clients that use the system and comprisesafter-trade-processing subsystems, as can be easily implemented by thoseskilled in the art or are commercially available through specializedvendors. In this alternate embodiment there is no need for end of dayanonymity and the broker execution reports can be dispatchedimmediately.

The FIX Server 120 preferably supports a variety of networking solutionsto provide connectivity to client Order Management Systems 10. Forexample the client's OMS can connect directly to said FIX Server; or itcan communicate with FIX Server 120 through a FIX Service Bureau thatfans out connections between a single FIX Server 120 and a plurality ofclients.

The FIX Server 120 will preferably reject tickets when they are invalidor when the client is configured not to use tickets; the ticket rejectmessage preferably carries an intelligible reject reason in the textfield. If the rejection is sent because the order quantity was less thanthe Large Block Quantity for this security, the correct LBQ ispreferably given for information in the message text in the rejectmessage. In the preferred embodiment the FIX Server 120 preferablysupports the following incoming messages: FIX New Order, Cancel Order,Cancel/Replace, and Order Status Requests, Outbound messages preferablyinclude Order Updates relating to child orders of a given ticket (a FIXExecution message carrying the Order-ID of the underlying ticket), ifthe client uses tickets. Clients that do not use tickets will preferablyreceive fills only (FIX Execution messages). In an alternate embodimentclients that do not utilize tickets receive Order Update messages foreach event relevant to an order entered via the GUI, including New Orderacknowledge messages, so that the OMS can keep track event-by-event ofthe total size being worked, as well as the size that has been filled.

The FIX Server preferably supports a web configuration screen whichenables an operator to set up and customize new client connectionswithout requiring a new software release. As mentioned above, FIXbuy-side clients can preferably be configured for either (a) FIXExecutions only, or (b) to support ticketing and execution reporting.FIX Sponsoring Broker clients will preferably be configured to receiveexecutions only. In an alternate embodiment it is possible to configurea sponsoring broker's FIX connection to receive a drop copy of everymessage sent to the sponsored client's OMS. In addition to the executionmessage sent on each fill, the configuration options preferably includean option to send a final FIX Execution message when an order iscomplete, with Order Status field set to “done”, to indicate that thework on this order is complete.

Order Manager.

The Order Manager 130 operates as a message processor. In the followingparagraphs the processing of various messages is described.

The system preferably enables users to enter New Ticket messages. A NewTicket message is a FIX New Order message with Order Type=Market and nolimit price. FIX Orders with a limit price will be rejected. In analternate embodiment this message may be submitted over an ApplicationProgramming Interface (API).

The following steps are preferably executed while processing a NewTicket (see FIG. 5), after the ticket is received at step 510:

-   -   Validation. At step 520, the system preferably processes new        orders by first validating the fields in the FIX New Order        message. A ticket must have a valid client-ID, a trader-ID (that        maps to a unique GUI), security and side (Buy or Sell) and be at        least as large as the block quantity for this security. Cloud9        preferably accepts FIX Orders (tickets) identified as “Market”        orders and “Not Held”, and rejects tickets that have a limit        price. In alternate embodiments the restrictions on price and        Not Held status are not enforced. A client preferably is only        permitted to have one ticket per security on each side; a second        buy ticket or a second sell ticket in the same security will be        rejected if the prior ticket still had leaves. If the prior        ticket was filled or canceled, then you can enter a second        ticket; it will replace the first on the GUI front end. An        alternate embodiment employs a front end that enables the        display of multiple tickets per security and the client is        permitted to place any number of tickets. Other business FIX        order attributes will be disregarded. Rejected tickets are        preferably displayed on the GUI with a reason code.    -   Processing. The system preferably stores valid tickets in its        database 150. The ticket is then displayed on the client GUI via        NetServer 110 at step 540, and acknowledged back to the client        OMS via FIX 120 at step 530. The table below gives required        fields in the Ticket message in the preferred embodiment.

Field Description ClientID The firm that enters the ticketClientTicketID Unique to this firm TraderID The GUI that will see theticket Quantity Number of shares Side Buy or Sell only Price Must beleft blank Symbol Supported within the system Type Must be MarketNotHeldFlag Must be set

The system preferably enables users to enter Cancel/Replace Ticketmessages, A Cancel/Replace Ticket is preferably submitted as a FIXCancel/Replace Order with the ClientTicketID of a prior open Ticket andthe ClientTicketID of the new ticket. In an alternate embodiment thismessage may be submitted over an API. In the preferred embodiment, thesystem carries out the following steps upon receiving a Cancel/ReplaceTicket message.

-   -   Validation. The system subject of the present invention        preferably rejects the Cancel/Replace message if the new        quantity minus already-filled quantity (new “Leaves”) is less        than the system Large Block Quantity for the symbol, or if it is        less than the total amount of shares placed on the execution        engine as open orders (leaves less than working).    -   Processing. If it accepts the request, Cloud9 preferably        modifies the ticket size to be applied to any subsequent order        entry events and pushes the change to the client GUI via        NetServer 110. It preferably also acknowledges the change back        to the client's OMS via FIX.

The system preferably enables users to enter Cancel Ticket requests. ACancel Ticket message is a FIX Cancel Order message with theClientTicketID of a prior open Ticket. In an alternate embodiment thismessage may be submitted over an API. The system subject of the presentinvention processes the Cancel Ticket message as follows (see FIG. 6).

-   -   Validation. The system preferably validates the fields of the        Cancel Request message in step 610 by ensuring that it points to        an open Ticket.    -   Processing. If there are open orders, in step 620 the system        will first try to cancel all open orders associated with the        ticket, then report any executions 630 that were done prior to        the cancel with messages in flight (this “cleanup” process ends        when all related orders are either filled or canceled and the        Cloud9 Order Manager's database agrees with the Execution        Engine's database on the status of any fills). When any open        orders have been cleaned up, in step 640 the system will        acknowledge the Cancel Ticket with the results indicating the        size that was canceled, if any. A successful Cancel Ticket        request will be notified to the Client GUI via NetServer in step        650.

The system preferably enables users to enter New Order messages. A NewOrder message is preferably submitted through the GUI or API andcomprises a request to buy or sell a given number of large block lots ofa given security at a limit price or better. In the preferred embodimentthe user may also select a pegged price limit, in which case the orderwill be limited at the less aggressive price between the absolute limitprice and the pegged limit price. New Order messages are preferablyhandled as follows.

Validation. The system preferably validates that orders are for amultiple of the large block quantity in a supported security. In analternate embodiment the order can be for any quantity. Another step inthe preferred order validation process is to verify that the ordercontains a price field. In an alternate embodiment this requirement iswaived if the user has selected a pegged price, in which case a peggedorder may float without limit. The Peg types supported in the preferredembodiment are pegging to the NBBO Midpoint, or no pegging at all.Alternate embodiments support additional pegging attributes, as areknown to those skilled in the art. The system preferably also validatesthat the side of the order is Buy or Sell. An alternate embodiment alsosupports short sell orders. The parameter PegOffset determines thenumber of cents (or fractions thereof) from the pegged value NBBOMidpoint) where the order should be priced. The PegOffset attribute ispreferably disregarded if the order is not pegged. The system preferablyreports rejected orders to the GUI Client with a comprehensible errorcode. If the client uses ticketing, the validation step also preferablychecks that the order does not exceed the size of the associated ticketand is on the same side as the ticket. If the client entering the orderhas a credit limit with a sponsoring broker, the system preferablyverifies as part of the validation process that the order does notviolate said credit limit; the credit verification process will bedescribed in greater detail below.

In the preferred embodiment IOC orders are rejected as invalid, sincethey can be used to probe for information about a standing order thathas caused the symbol active flag without showing the contra presentflag to the owner of said standing order. In an alternate embodiment IOCorders are accepted but the owner of a standing order can see a flashingContra present flag (e.g., the symbol changes from orange to yellowbriefly then reverts back to orange). In yet another alternateembodiment the IOC orders are accepted and do not cause any flags to besent out, be it an active symbol flag or a contras present flag.

Order attributes. The system of the preferred embodiment expects to findthe required fields in the New Order message as given in the followingtable.

Field Comments ClientID Firm that entered the order TraderID GUI thatentered the order ClientOrderID Unique to this firm Quantity SharesPrice Optional if pegged. Pegged orders with a limit act as limit ordersif the peg value crosses the limit. Side Buy or Sell only Symbol On thePrimary Market Time-in-Force (TIF) TIF is either an absolute time orDAY. All orders expire at the end of the trading day. Peg MID, NONE.Will execute at the pegged value or better. PegOffset Signed dollaramount to be added to pegged price

Processing. The system preferably processes valid orders through thefollowing steps (see FIG. 7).

-   -   After validation (step 710), valid orders are passed to the        execution engine immediately in step 720. The response will        indicate whether the order was Rejected, or accepted and placed        in the book as an open order, or has an execution pending. The        status from the execution engine is reported to the GUI client        via NetServer.    -   If the client uses FIX Tickets, the system preferably reports        the order status back via FIX as Accepted or Rejected (step        730); the execution pending status will be reported as Open        status in FIX (a subsequent locked-in execution message will        follow). The FIX order status update message carries the ID of        the associated ticket.    -   If the Execution Engine indicates that the order is Open, the        system will initiate a process 740 through the facilitator with        the aim of increasing the likelihood of a trade.        -   The system preferably determines whether the price is within            the latest published value of the Block Price Range (BPR),            and if so, tags the order as “aggressive.” For this            evaluation, pegged orders are priced using a Market Data            Cache.        -   If the order is marked as “aggressive,” the system            preferably determines whether there are aggressive contra            orders in the system. If there are, the Contras Present flag            is sent immediately to resident contras that do not already            have it, and an event is scheduled to re-evaluate the            Contras Present status after a delay of ContrasPresentDelay            seconds. If both the first participant's order and at least            one contra order are still aggressive and within the BPR at            the occasion of this scheduled event, the system sends the            Contras Present flag to the first participant.        -   If the order is marked as “aggressive” and the symbol is not            already in an active state, set the symbol in an active            state and generate an Active Symbol message.    -   In step 750 the system waits for contra orders to arrive; each        contra order is processed as in this flow starting at the        validation step 710. Contra orders with an equal or better price        preferably execute at the resident order's limit price.

The system preferably enables users to enter Cancel Order messages.Cancel Order is a GUI/API message with an ClientOrderID corresponding toa prior New/Replaced Order. In an alternate embodiment cancel orderrequests may also be received via FIX.

Validation. If the order ID is invalid or points to an order that is notknown within Cloud9 as being Open, the cancel order request is rejected.

Processing. The system 100 preferably processes Cancel Order requeststhrough the following steps.

-   -   Cloud9 OM 130 passes valid cancel order requests to the        execution engine 50.    -   The Execution Engine 50 will respond with the shares that were        canceled. The cancel response may be preceded by an        execution(s). For filled or expired orders the cancel request is        rejected.    -   Upon receipt of the successful cancel response from the        execution engine 50,        -   The order status update is pushed to the GUI Client 20 and            the Analytics Server 160.        -   If the client uses FIX Tickets, also report the status            update via FIX.        -   Release credit that was allocated to this order.        -   Check whether there were contras with a “contra present”            flag and remove the flag if the contra present condition is            no longer met.        -   Note: a cancel order does not remove the active symbol flag.

The system also enables the user to enter cancel/replace order requeststo modify a prior order. In the preferred embodiment the Cancel/ReplaceOrder is a GUI/API message pointing (ClientOrderID) to a valid priorNew/Replaced Order. In an alternate embodiment this message can also beentered via FIX.

Validation. The ClientOrderID must point to a valid order. The systempreferably rejects a cancel/replace request if it points to an orderthat is already known within Cloud9 to be canceled, expired or filled.In the preferred embodiment the system supports pre-trade creditchecking. Therefore, if the size of the order is to be increased throughthe cancel/replace request, the system first verifies that the new sizewould not exceed the credit limit on the user's account. Replace orderrequests that fail credit validation are rejected as invalid with areason code explaining the credit reason.

Cancel/Replace Order processing. Cloud9 OM 130 processes cancel/replaceorder messages by passing them through to the execution engine. Theexecution engine 50 will respond with the order status including filledshares, remaining open shares, and average price.

-   -   Trade Message. The status update will be pushed to the GUI        Client via NetServer 110.    -   If the client uses FIX Tickets, also report the status update        via FIX.    -   If the cancel/replace modifies the size of the order, cancel and        replace credit amount allocated to this order to reflect the new        order.

Trade Message. The execution engine 50 reports trades to the OrderManager 130 via a Trade Message. Each Trade Message from the ExecutionEngine reports a locked-in trade involving exactly two orders.

The Execution Engine 50 will match individual orders against a book ofcontra orders (one-to-many match). There can be multiple individualtrades following a match check, each of which will be processedindependently.

Since a trade is a single transaction, both legs of the trade should bereported as a unit.

The preferred embodiment of the system expects to find the followingfields in a Trade Message.

Description Type TradeID Id for this trade String NewOrderID The “One”in a One-to- String many match ResidentOrderID The contra order StringQuantity Shares INT NewAvgPrice Average share price across FLOAT allfills of the order. NewFilled Number of shares filled. INTResidenAvgPrice Average share price across FLOAT all fills of the order.ResidenFilled Number of shares filled. INT Price As reported to ACTFLOAT ACTTradeID As reported to ACT String TimeStamp As reported to ACTHHMMSSCC BidTimeStamp Most recent quote received HHMMSSCC on the Bidside (whether or not it caused a price change) OfferTimeStamp Mostrecent quote received HHMMSSCC on the Offer side (whether or not itcaused a price change)

Processing a trade message. The system 100 preferably processes TradeMessages from the Execution Engine 50 through the following steps.

-   -   Report both fills to the relevant GUI clients and via FIX for        clients that use Tickets or request FIX executions.    -   Update credit to reflect the actual amount of credit consumed        based upon the price of the trade.    -   If the trader uses tickets and the residual quantity on the        ticket is less than the Large Block Quantity for this symbol,        expire the remaining quantity on the ticket.    -   Send Block Tape Message to Net Server for delivery to GUIs that        watch this security. The block tape message preferably contains        the following fields.

Description Type TimeStamp Reported by the HHMMSSCC Execution EngineQuantity Shares INT Price FLOAT TotalQuantity Traded in this securityINT since start of day

The system preferably enables traders to cancel all orders they havepreviously placed into the system with a single request, in the event ofan emergency. CancelAllClientOrders is a message from Net Serverrequesting cancellation of all orders that have been entered by a givenGUI. In an alternate embodiment this message can also be delivered viaFIX. Since the execution engine 50 does not know the customer ID, Cloud9OM will process the cancel-all message by individually canceling everyorder associated with this client that has an Open Status, processingthese as individual Cancel Order requests.

In order to keep track of the price aggression of orders that areassociated with contras present or active symbol indicators, the OrderManager 130 in the preferred embodiment subscribes to BPR UpdateMessages from the Analytics Server 160 in securities for which it has anopen order. Whenever the BPR is refreshed, OM 130 reviews the“aggressive” flag on open orders and updates the flags as follows.

If there is a change in the price aggression flag on an order,re-evaluate if there is a contras present situation for all orders inthis security and update contra present flags to ON state when there arecontras present for an order that are priced at least as aggressively asthe BPR, or OFF if there are no longer eligible contras present. If thisresults in a change in the Contras Present Status on an order, thesystem preferably sends a Contras Present Message to affected GUIclients.

The system of the preferred embodiment also updates the active status ofan order based on BPR update messages. If the symbol is in an activestate, has been in this state for at least 60 seconds, and there are nolonger any orders within the BPR, the symbol is set to an inactive stateand NetServer sends an Active Symbol message with ActiveSymbolStatus=Notactive.

Unsubscribe to BPR update messages. In an alternate embodiment theactive symbol status is updated on any BPR update message and may be setto an inactive state even if the symbol has been active for less than 60seconds. In yet another alternate embodiment the active symbol isupdated on every change to the National Market Best Bid and Offer pricesand every order entry or cancellation event to ensure that the activesymbol flag always indicates that there is a live executable order inthe system at this time, priced at least as aggressively as the passiveend of the BPR.

Execution Engine.

The execution engine 50 in the preferred embodiment is a decoupledsystem that communicates with the Order Manager 130 through acommunication network 80 such as the Internet. In an alternateembodiment the Execution engine 50 is hosted in the same facility as theCloud9 system 100 and the two systems communicate over an intranet. Inanother alternate embodiment the Execution Engine 50 is a componentwithin the Cloud9 system 100; in all these embodiments the functionalityof the Execution Engine 50 is as described below. The Execution Engine50 receives “anonymized” orders, meaning that the order is stripped ofthe buy-side customer ID, and identified instead by an internal Order-IDand the sponsoring Broker-ID. The Execution Engine 50 processes newincoming orders by checking to see if there are resident orders thatmatch with the incoming order and executing trades with resident ordersranked using price time priority, as we describe in more detail below.

The Execution Engine 50 in the preferred embodiment is the book ofrecord for recovering the true status about any Cloud9 trades in theevent of a failure.

The preferred embodiment of the Execution Engine 50 supports Limitorders and orders pegged to the NBBO Midpoint. In an alternateembodiment other order types known to those skilled in the art are alsosupported. For example an alternate execution engine may support pricediscretion orders that are executable at a limit price against marketorders, but may automatically increase their price aggression to triggera match with an incoming limit order up to a predetermined discretionamount. In another example of an alternate embodiment, the systemenables traders to enter orders that are to be priced at a later timebased on a volume-weighted average price (VWAP) for a forward timeinterval, such as the VWAP from the time of the trade until end of day,or the VWAP over a specified time interval, such as a half hourinterval.

The orders in the preferred embodiment can be described as limit orderswith an optional Peg. All orders are required to have a limit price; ifthey have a Pegged price as well then the order is considered to bepriced at the more passive price between the limit and the pegged value.Pegged orders are priced on the occasion of a match check event and arethen treated the same as a limit order at the more passive of the limitor pegged prices. The pegged value is the NBBO Midpoint plus a PegOffset amount.

Users in the preferred embodiment will use the Peg as a protection on alimit order to ensure that if the market moves swiftly, their order doesnot trade at a price that suddenly stands at a very aggressive level ascompared to the NBBO prices. The GUI 20 suggests this way of using a Pegby representing the feature as “Price protection” and offering theoption to “not trade more than <n> cents from the NBBO midpoint price.”

Because there are both pegged orders and limit orders in the system, amatch may also be triggered not on order entry, but as a result of achange in the NBBO prices that would cause a pegged order's price tocross a contra order's limit price.

Therefore, in the preferred embodiment of the present invention, a matchcan be triggered either on entry of a new order, or on a change in theNBBO prices that causes a pegged order to cross with other orders. Thesystem preferably implements the following process to identify suchmatches.

The Execution Engine 50 preferably comprises a component that receivesall quote update messages from the data provider 60 and keeps track ofthe current best bid and best offer, using information cachingtechniques that are known in the art. It preferably also enables acomponent of the Execution Engine 50 to subscribe to price updates for agiven security, whereafter it will receive a message whenever the bestbid or the best offer in the given security changes.

The Execution Engine 50 preferably maintains a list of symbols for whichit has one or more Limit Orders on one side and one or more Peggedorders on the other side and subscribes to NBBO price changes for allsecurities in this list. Pegged orders with a limit price count both aspegged orders and as limit orders for the purpose of the presentdescription. For the symbols within this list, Execution Engine 50 willprocess each NBBO price change by pricing all pegged orders in thesecurity and then ranking all orders on the buy side and on the offerside in price time priority.

The system preferably proceeds to identify matches by taking first thetop-ranked buy order, and processing trades between this order and sellorders in price time priority. If there are still unfilled sell orders,it proceeds with the second-ranked buy order and again processes tradeswith the yet-unfilled sell orders in price time priority.

The Execution Engine 50 will preferably observe trading halts on theprimary market as follows. While a security is halted, all existing andnew orders will be declined. The Execution Engine 50 derives thesecurity-trading status from a Data Vendor 60. If the Data Vendor 60 isunable to provide the service or the corresponding communicationsnetwork 70 fails, the Execution Engine does not process any trades butsimply waits for the vital services to be re-established.

The market data feed in the preferred embodiment contains the markethalt information as well as level 1 and last sale data for purposes ofthe Analytics Server 160.

If a New Order triggered the match, the Execution Engine preferablyreports the execution pending immediately to Cloud9 OM 130 with theexpected total match quantity. This report is informational only for useby the Facilitator 140 and does not guarantee that the trade will clear,as we will see below.

A trade is preferably processed as a single transaction, as is known inthe art, to avoid the risk of the system reporting one side of the tradeand not the other in the event of a failure. The processing involves thefollowing steps.

-   -   1. Report the trade to the regulatory organization as required        and update the order status in the database. In the preferred        embodiment the trade is reported to the Nasdaq ACT system. The        matching engine reports to ACT immediately for data        dissemination (tape reporting) and for clearing purposes.    -   2. When the trade is successfully locked in for clearing (ACT        acknowledges trade reports and assigns an ACT report ID), the        Execution Engine 50 preferably sends a firm trade report message        to the Order Manager 130. Trades involving pegged orders are        preferably reported with the timestamp of the most recent bid        and the timestamp of the most recent offer that were used to        calculate the NBBO midpoint, as well as the timestamp at which        the execution was processed.

The Execution Engine 50 processes incoming messages as follows:

New Order Processing. New Order is a message from the OM 130. It ispreferably processed as follows.

-   -   Identify matching orders, if any, and acknowledge order entry        with status to the Order Manager 130.    -   If the order is not filled but causes a situation where there        are limit orders on one side and pegged orders on the other,        register for NBBO price updates in the security.    -   Process any trade as described above.

Cancel Order. Cancel Order is a request from Cloud9 OM to cancel an openorder. It is preferably processed as follows.

-   -   Verify whether the Cancel Order request carries a valid order ID        that points to an order in the Book 51.    -   If the order has already been traded, reject the cancel order        request message    -   It the order is not yet traded:        -   Mark the order status as canceled in the Execution Engine            database (Book 51).        -   Report the successful cancel status to the Order Manager            130.

In the preferred embodiment an order can be modified or canceled at anytime. In an alternate embodiment the orders are required to have aminimum time in force of 10 seconds to give other participants areasonable time to react to events triggered by the Facilitator 140,such as an Active Symbol flag or a Contras present flag.

The system preferably also enables the Order Manager 130 to requestcancellation of all orders associated with a given sponsoring broker, orall orders altogether. The Execution Engine 50 processes such aggregatecancel order requests by first identifying all affected orders and thenprocessing the cancel order requests by time of entry of the orders.

The Execution Engine 50 preferably validates connectivity with the OrderManager 130 using 30-second heartbeats. On loss of connection, thesystem preferably cancels all orders.

NetServer.

The system preferably comprises an Application Programming Interfacethat enables a client GUI 20 to connect to the NetServer 110 through acommunications network 80 such as the Internet. NetServer 110 allowscustomer front-end applications to access Cloud9 trading services suchas the viewing of BPR updates and entry of orders in to the system.

If loss of connectivity to a client is detected, Cloud9 preferablyattempts to cancel all the client's orders with the Execution Engine 50.In an alternate embodiment the system allows clients to select aconfiguration wherein the loss of connectivity does not causecancellation of open orders; clients that elect this alternateconfiguration then have to call the Help Desk to cancel orders in caseof an emergency.

NetServer 110 passes trading activity messages (orders, cancel/replace,cancels) to the order manager and passes responses and unsolicitedmessages back to the client. It also stores client GUI configurations,such as the location and size of windows on the screen and the list ofsecurities that the trader wishes to watch. These examples do notconstitute an exhaustive list but instead are intended for the purposeof illustration only; other configuration parameters are stored tosupport normal GUI display options as can easily be apprehended by thoseskilled in the art.

In a preferred embodiment, the GUI enables traders to view credit alertsgenerated by the system when the amount of available credit falls belowthe dollar amount typically required to execute a large block trade. Inan alternate embodiment credit alerts are not displayed and the usersimply discovers the absence of sufficient credit upon the failure of anorder entry request.

In the preferred embodiment of the subject invention, the GUI 20 enablestraders to access a dialog that facilitates management of a watch listof securities. The purpose of the watch list is to limit the flow ofinformation from the system to the symbols that the trader is interestedin. In the preferred embodiment, the system also enables a trader to seewhether or not there is someone else with an open GUI currently watchinga given symbol (this being of interest since it would increase thelikelihood of a trade). In an alternate embodiment the GUI 20 enablesusers to see the number of traders watching a security. The GUI 20 willregister for BPR update messages and for receipt of the Active Symboland Contras Present messages only in watched securities. In thepreferred embodiment the API allows a GUI to register forBPR/Active/Contras Present messages in any security, and separatelyregister for quote update messages in a separate list of securities. Thepreferred GUI 20 only displays NBBO prices for one security at a time,namely the one for which the order entry dialog is open, as depicted inFIG. 2. In an alternate embodiment the GUI subscribes to NBBO updates inall watched securities and these prices are displayed next to the symbolin a drop list.

To manage the watch list, users are preferably able to add individualsymbols, or add all symbols that are classified as being in a knowngroup of securities, such as an industry group or a sector. The systempreferably also enables users to submit their own groups of securitiesin the form of an Excel file and load these groups into the system, atwhich point they are simply added to the list of groups of securitiesthat the trader may choose from to populate his or her watch list.

A preferred watch list configuration dialog is depicted in FIG. 8. Theuser is able to add symbols or groups of symbols. The changes are in apending status until the user saves the changes. Users can also revertto a prior saved watch list or load a group of securities from an Excelspreadsheet which can be, for example, derived from their. OMS orblotter.

The watch list is preferably managed by the client and persisted on theserver.

In a preferred embodiment Net Server 110 keeps track of which symbolsare being “watched” by two or more GUIs. If a symbol is added to atrader watch list, causing the number of watching clients to reach two,NetServer 110 will broadcast a message to all GUIs that subscribe toactive symbol messages to indicate that the symbol is watched. If thenumber of watching GUIs drops to one, NetServer will broadcast a messageto the GUIs that subscribe to active symbol updates to indicate thatthis symbol is no longer being watched. In an alternate embodiment themessage is sent any time a user adds or removes a watch on the symboland gives the symbol, timestamp, and updated number of parties watchingthe symbol.

The GUI 20 preferably shows all symbols that are both in the trader'swatch list and are either active or have contras present, byhighlighting them on the top of the GUI through color-coded rectangles,using the color orange for active symbols and yellow for contraspresent. In an alternate embodiment the messages indicating that awatched symbol has become active or has contras present is displayed bymeans of a temporary popup screen, similar to instant messengerapplications. In another alternate embodiment these popup messages stayvisible until action is taken, either by clicking to generate an orderentry dialog and entering an order in response to the message, or byclicking on a “close” or “minimize” button to either close the popup orreduce it to a bar at the bottom of the screen.

The trader GUI 20 in the preferred embodiment has the option of showingor not showing the symbols on their watch list that are in a “watched”state (i.e., at least one other trader is watching this symbol). If theychoose to see these symbols, when they are not “active” or with contraspresent they will be represented in a third color that is less strikingthan the other two since the trader's attention is not immediatelyrequired; in the preferred embodiment the GUI 20 presents watchedsymbols in a gray rectangle next to the active and contras presentrectangles.

The NetServer 110 preferably exposes an API for remote clients to accessthe system's services. The API preferably enables the user to open asession though basic authenticating (username password) prior to usingany trading services. In an alternate embodiment the clientauthenticates itself with a certificate. The exchange of usercredentials is preferably done via a SSL session, which exchangesencryption keys using the Net Server public key. Once the user isauthenticated the session maps to the users identity.

The NetServer API preferably exposes the following functions.

-   -   Get Sector List: Each firm can optionally have securities        arranged by sector or other security grouping. The security        groupings can be configured per client firm. The API returns the        list of securities associated with the client's firm and group        name,    -   Get Security List: The system has a list of configured        securities. This function returns that list. Each element of the        list is the Symbol, Company Name, and Sector.    -   Set & Get Trader Defaults: The system enables a client to store        default parameters. The following list is not intended to be        exhaustive, but contains some of the trader defaults that are of        particular interest; others will be apparent to those skilled in        the art.        -   Default Placed amount. The order entry dialog will populate            the quantity field by default with either the minimum            quantity for this symbol (Large Block Quantity) or with the            trader's total ticket size, if this trader uses tickets.        -   Default Price. The order entry dialog will populate the            price field with a limit price chosen via one of the            following rules: Aggressive end of the NBBO, passive end of            the NBBO, NBBO Midpoint, Aggressive end of the BPR, Passive            end of the BPR, or BPR Midpoint.        -   Default TIF. The order entry dialog will populate the time            in force field with this number of seconds.        -   Default Watch List Management (Security, Sector). All watch            list management is handled by the front end and persisted on            the server.        -   Default Peg and offset. The order entry dialog will select            or not select the Peg option by default and if selected, it            will add this number of cents as peg offset for buy orders,            or subtract this number of cents to the midpoint peg for            sell orders.        -   Ticketed Orders Only. This option determines whether a            trader wishes to check orders against the size reserved by            means of a ticket. If this option is not selected, the            trader will be able to enter orders even when there is no            corresponding ticket.        -   Set & Get Sector Watch List: Save and retrieve a list of            securities that comprises a sector or other group.        -   Set & Get Symbol Watch List: Save and retrieve the list of            securities that are in a given watch list.    -   Set & Get GUI Defaults:        -   Ticket Management Grid: option to start the application with            the window that displays the list of tickets open or hidden.        -   Ticker Management Grid definition: font, field order, col            size, col type, headers and field=col mappings.        -   Active Symbol list (open or close). Option to start the            application with the window that shows the list of active            symbols open or closed.        -   Color Changes (Yes, No): The GUI preferably allows users to            select this option to highlight any field of an order in the            order entry dialog when the order has already been submitted            to the system and this field has since been edited. When a            field has been edited the user can press a “replace” key to            send the new value to the system via a Cancel/Replace order            message. Highlighting the fields that have been edited            assists the user in managing an order.    -   Get Heartbeat Interval. Number of seconds for the periodic        heartbeats to determine whether the connection between the GUI        20 and Net Server 110 is operational. The system preferably        imposes a lower bound on this parameter to avoid overloading        NetServer 110 with connection management duties. In an alternate        embodiment the parameter can only be set on the server and is        not exposed via the API.    -   Get Tickets: gets the user's tickets. Within the trading day,        the user can only have one ticket per symbol/side. If the ticket        is cancelled, the size decrements to the unexecuted size. New        tickets with the same symbol and side replace the entry in the        list.    -   Get Orders: Gets a list of all orders.    -   Get Order Status. Returns the order details for the        ClientOrderID.    -   Submit New Order: Queues a new order into the system.        Asynchronous call that will be followed up with OnOrderUpdate or        OnOrderReject event(s).    -   Replace Order: This function queues a replace order request. The        caller assumes the order state to be in “Pending Replace” upon        return. Asynchronous call that will be followed up with        OnOrderUpdate or OnOrderReject event(s). Replaced Order details        are the same as New order details+OrigClientOrder ID field. The        quantity is the total quantity including filled size.    -   Cancel Order: This function queues a canceled order request. The        caller assumes the order state to be “Pending Cancel” upon        return. Asynchronous call that will be followed up with        OnOrderUpdate or OnOrderCancelled event(s).    -   Execute Trade. This function requests that this trade be        reported to the sponsoring broker to set up allocation process.        This would be done automatically at the end of the trading day.    -   Get Trades for (ClientOrderID, Symbol, or ALL) Request/response        to retrieve trade details. There are preferably three versions        of this request. Get trades for an order, for all orders in a        security, or for all trades for this GUI client.

The following are API events—i.e., messages produced by the system andpushed to the GUI 20 through the API.

-   -   OnTicketUpdate: this event is raised on new, replaced, and        cancelled ticket events.    -   OnOrderUpdate: Event raised on order state changes. This        includes order management responses to the requests above or        through other channels.    -   OnOrderReject: Event is raised in response to a new/replace        order request entered within this session.    -   OnCancelReject: Event is raised when a cancel request is        rejected.    -   OnTrade event is raised when there is a trade within one of the        traders orders entered through this API or another channel.

The preferred embodiment of the NetServer 110 also provides an interfacefor subscribing to market data per security. Fields include: (NBBO bid,ask and TapeTimeStamp), (BPR Low and High), Block Tape (Last and totalvolume), Active Symbol, Contras Present, Security State (open, closed,halted, etc), and timestamp. The functions exposed in the preferredembodiment of this interface are:

-   -   Subscribe Request/Response: This function preferably adds a list        of securities provided in the request message to the client's        subscription list. The request returns a snapshot of that        entry's current data for the requested fields. Subsequent        changes to the watched fields will raise an update event        (OnUpdate) with the changes.    -   Unsubscribe Request/Response: Removes the subscription request.    -   OnUpdate Event: Notifies the subscriber of field changes within        a Subscription entry.    -   Start Active Symbol Feed Request/Response: Returns a list of all        symbols where the active symbol flag is set. Subsequent to the        call, all state changes in active symbol flag changes will        result in OnActiveSymChange (Symbol, On/Off).    -   Stop Active Symbol Feed Request/Response: terminates above event        notifications.    -   OnActiveSymChange event notifies the subscriber of active symbol        flag changes

Research Data Storage.

The system preferably stores information that allows operators andresearch staff to evaluate how indicators of trader activity in a symbolcorrelate to fill rates when users enter orders. This information playsan important role in steering usage of the system toward workflows thatlead to greater success, through marketing media and visits to thetraders' stations. For example, if the fill rate following entry of anorder in a security that is not watched is extremely low or null,traders may be advised to focus their trading on the system insecurities that are watched by other traders. The system preferably alsocan be reconfigured to modify the rules of when flags are sent out, toimprove fill rates in the system. For example, if it is determined thatfill rates are substantially higher when there are three or more traderswatching the security than two, then the system can be reconfigured tosend out the watched symbol message only when the total number of GUIusers is three or more, rather than two or more. The above examples areintended for the purpose of illustration and not to provide anexhaustive list; other optimizations based on modifications ofparameters given above will be apparent to those skilled in the art.

The trader activity measures are available on the help desk, andexported to a permanent data repository at the end of each day foroffline analysis with the purpose of finding correlations betweenpossible system configuration settings and higher fill rates.

The measures of interest are:

-   -   Order activity (entry, BPR aggression changes; cancel/expire)    -   Fills    -   Tickets    -   Number of traders that can see the symbol active flag (on watch        list, as a symbol, or as part of a sector)    -   Number of traders that can see the BPR updates (subscribers)    -   Number of traders that can see the quote updates (subscribers)

The data tables below (A-D) are stored in standard comma-delimited (CSV)format.

TABLE A Ticket Table Description Type Timestamp To hundredth of a secondHHMMSSCC Symbol CHAR[5] Quantity Multiple of the Large Block INT QtySide Buy, Sell Enum

TABLE B Order Table Description Type Timestamp To hundredth of a secondHHMMSSCC Symbol CHAR[5] Quantity Multiple of the Large Block INT QtySide Buy, Sell Enum BPR Yes/No Boolean Status Open, Rejected, Canceled,Enum Expired, Filled

TABLE C Trades Table Description Type Timestamp To hundredth of a secondHHMMSSCC Symbol CHAR[5] Quantity Multiple of the Large Block INT QtySide Buy, Sell Enum

TABLE D Watch List Table Description Type Timestamp To hundredth of asecond HHMMSSCC Symbol CHAR[5] SymbolActiveWatchers Number of clientswho are INT able to see the symbol active flag (symbol is on their watchlist) BPRWatchers Number of clients watching INT the symbol BPR updatesQuoteWatchers Number of clients watching INT quote updates for thesymbolAnalytics Server.

The Analytics Server 160 in the preferred embodiment keeps track of theNational Best Bid and Offer prices by listening to a vendor quote feed60 and updating said NBBO prices when the quote that made the best priceis either canceled or improved by a new quote with a better price. Thecurrent NBBO prices are preferably stored in a cache using methods wellknown to those skilled in the art. In addition to the NBBO prices,Analytics Server 160 calculates a Block Bid and a Block Offer based uponrecent quote and trade data.

The Analytics Server's main function is to produce the followingmessages:

-   -   NBBO price changes.    -   Block Price Range updates.

The analytics server will store last sale data and all changes in theinside bid or offer prices throughout the day, in all supportedsecurities. The data that needs to be stored for analysis is describedin the Tables E and F.

TABLE E Inside Market Price Updates Description Type Timestamp Tohundredth of a second HHMMSSCC Symbol Primary market symbol for CHAR[5]the security ChangeType New Bid, New Offer, Both Enum BidPrice In unit 1cent ticks FLOAT.2 OfferPrice In unit 1 cent ticks FLOAT.2 SecurityStateTrading state of the security Enum (open, closed, halted, etc)

TABLE F Last sale Description Type Timestamp To hundredth of a secondHHMMSSCC Symbol Primary market symbol for CHAR[5] the security QuantitySize of the trade INT Price To tenths of a penny FLOAT.3

The Analytics Server 160 delivers quote update messages to all connectedclients whenever there is a change in the inside market best bid priceor best offer price. The update message carries the new bid price or newoffer price and timestamp associated with the appearance or removal ofthe quote that changed this bid or offer.

The Analytics Server 160 preferably also updates the BPR every 60seconds, and sends a BPR Update message to the Order Manager 130 for thepurpose of determining the price aggression of its orders and to NetServer 110 for broadcasting to GUI Clients 20.

The preferred embodiment comprises a replaceable module that isresponsible for calculating the BPR. The BPR can be calculated usingmethods known to those skilled in the art, such as for example by takinga Block Bid equal to the National Best Bid price minus 5 cents, and aBlock Offer equal to the National Best Offer plus five cents. In anotherexample, the amount of cents to be added (subtracted) to (from) the NBBOprices is set in proportion to the historical volatility of the stock,so that for very volatile symbols such as technology issues thevariation might be greater than 5 cents, while it would be less for moresteady stocks such as blue chip utilities.

The algorithm used in the preferred embodiment of the present inventionconsiders the highest and lowest prices that have traded in the past 60seconds, H and L respectively, as well as the current NBBO Midpointprice M, and calculates the Block Bid and Block Offer through thefollowing steps [FIG. 9]:

-   -   Step 910. Determine the prices H, L and M for a given security        as defined above.    -   Step 920. Looking at last sale data back to the timestamp of the        last BPR update, find the trade that was printed furthest from        the current NBBO midpoint. Let X denote the absolute price        difference between this trade price and the current NBBO        midpoint. Thus, X is the greater of H-M and M-L.    -   Step 930. Let Z=Y+(MaxBlockSpread/2−Y)*(1+1/(1+exp(−BETA*X)),        where Y is a parameter set per security that sets a lower bound        on the spread between the Block Bid and Best Offer,        MaxBlockSpread is the upper bound on said spread, and BETA is a        parameter, which can be set to 10.0 for example.    -   Step 940. Calculate the Block Bid to be equal to M Z, and Block        Offer equal to M-Z.    -   Step 950. Issue BPR Update messages to the Order Manager 130 and        NetServer 110.

Credit Management.

The system preferably enables sponsoring brokers to set credit limits ontheir customers' accounts. In the preferred embodiment, credit checkingis based on a gross dollar limit, counting the total value of sharesbought plus shares sold. Orders will be validated for credit based uponthe greater of the top of the BPR or the order's limit price, and creditwill be adjusted based upon the actual credit amount consumed when theorder is completely filled, expired, or canceled (on partial fills).

-   -   Brokers will be given a web account to manage credit; they can        view the level of credit currently consumed by a client, but        only binned as follows: less than 25%; 25-50%; 50-75%; more than        75%.    -   Brokers must be able to increase today's credit with immediate        effect; or they can increase or reduce the amount of credit that        gets refreshed at the start of each trading day. A broker can        also suspend credit; this has effect both intraday and for        following days. If day's credit is suspended, the system will        cancel all open orders.    -   The broker can later un-suspend credit for a client. Suspensions        have permanent effect and persist into the next day. Credit is        refreshed at the end of the day.    -   The broker will be able to set up a credit alert threshold as a        percentage of the total (default=75%); additionally, the system        will generate an alert whenever the available credit falls below        a system-configured dollar amount MinCreditAmount that is too        low to utilize the block system (for example, $2 million).        Credit alerts will be delivered to Help Desk personnel and        pushed to the client GUI.

Help Desk.

The system preferably provides a Help desk interface to be used bypersonnel that handles calls from customers. This user interface can bea web browser interface, with access secured through Public KeyEncryption and certificate-based authentication as well as a usernameand password pair. The interface preferably enables the user to viewdetailed information about the life of an order. The user can pull upthe list of orders with a given symbol and client ID to locate the orderthat the customer is calling about. The help desk interface enables itsuser to click on an order of interest to view the following messages inchronological fashion.

-   -   Ticket, if applicable.    -   Order Entry request(s).    -   Order Entry Response: rejected (with reason code); execution        pending; expired; open.    -   Fills.    -   Contras present flag(s) sent against an order.    -   Modify Order Requests, and responses (accepted, rejected),    -   Cancel Request and response (accepted, rejected).    -   Expiration.

In addition, the help desk operator is able to see the NBBO insideprices, timestamp of the most recent quote seen on the bid and offersides, respectively, BPR prices and timestamp, on each significant eventin the life of an order (entry, cancel, execution). This is of use foranswering questions such as why the symbol did or did not change to anactive state when the order was entered, etc.

In an alternate embodiment the help desk operator cannot view symbol orside of any order, to reduce the security risk associated with tradersbeing aware of the trading interests of institutional customers. In thisembodiment, the help desk operator identifies a caller's order bypulling up the list of orders associated with the trader, with the timeof entry and size of each order as well as the ClientOrderID which isalso visible on the trader's GUI 20. The help desk operator works withthe trader to identify which order he or she is inquiring about, thenproceeds as above by clicking on the order to view the correspondingactivity trail.

In the preferred embodiment the Help Desk also enables its operator toselect a client firm from a drop list, and view their configurationspertinent to trading logic. The list below gives the more important userconfigurations and usage statistics for the help desk operator; the listis not intended to be exhaustive, others will be easily apprehended bythose skilled in the art.

-   -   Credit limit and credit consumed.    -   Activity by trader: number of orders, traded shares, traded        dollars.    -   List of trader; select one to view and edit trader options.    -   Watch list management (add/remove symbol, add/remove industry        group),    -   Show/don't show active symbols bar.    -   Show/don't show drop list of tickets.    -   Default ticket attributes.

The preferred embodiment also enables brokers to access a web page usingthe same authentication and security model as for Help Desk operators.Brokers will use this page for credit management purposes. In order tomaintain the client's confidentiality, the interface preferably limitsthe information displayed to the broker in such a way as to not revealthe details of the client's trades. In this embodiment, the broker canview the amount of credit consumed by a client only as a percentage ofthe total credit limit; for example, this can be binned in fourintervals: less than 25%, 25-50%, 50-75%, and greater than 75%. Thesponsoring broker additionally is enabled to modify the client's creditthrough the following functions.

-   -   Add intraday credit.    -   Add credit today and also increase the refresh amount for        following days.    -   Lower refresh amount for following days.    -   Suspend credit.    -   Unsuspend credit.

In an alternate embodiment the trades are reported to the sponsoringbroker immediately and the sponsoring brokers are able to view executedtrades as well as the precise amount of credit consumed. In anotheralternate embodiment the sponsoring broker can also view pre-tradeactivity.

System Configurations Interface.

The system preferably enables an operator to modify the configurations,and add/remove a client or sponsoring broker, during an off-hours systemmaintenance schedule.

The system configurations interface enables the system operator to add aclient and set required configurations attributes to enable the user totrade. New client firms must choose a sponsoring broker from a list ofavailable brokers. The sponsoring broker is preferably unique for alltraders within the same firm. In an alternate embodiment the same firmcan use a plurality of sponsoring brokers, and the GUI 20 lets thetrader select a sponsoring broker on order entry. The new firm canoptionally set up FIX communications directly to FIXServer 120, orthrough the sponsoring broker 95. In the latter case the sponsoringbroker forwards FIX messages from the client to FIXServer 120 on itsbehalf. A firm may select two modes of FIX connectivity depending ontheir workflow requirements: FIX channel can be set up to receiveExecutions only, or to receive Executions and Order updates. They can beset up to enter tickets and check GUI-entered orders against the sizeallocated through a ticket, or to work without the use of tickets. Whena client firm is added to the system, the Help Desk personnel will callthe broker to set up any credit limits for the customer's account, andagree to a client-ID to be used for end of day reporting. New users arepreferably required to configure GUI/API access to be able to trade onthe system. In an alternate embodiment order entry is also supported viathe FIX interface, and the user is not required to use the GUI 20 or APIaccess.

The system configurations interface preferably also enables the systemoperator to add a sponsoring broker to the list of supported brokers. Inan alternate embodiment the system is operated by a single sponsoringbroker and cannot be accessed through a third party broker relationship.In configuring a sponsoring broker, the operator will create a useraccount for the sponsoring broker to manage credit for their clients'accounts as described above. Broker contact information such as atelephone number, FAX, and email must be entered and stored in thesystem database 150; Help Desk personnel will utilize this data tocontact the broker for credit issues. To complete the process of settingup a new sponsoring broker the following steps preferably are executed.

-   -   Brokers must set up a FIX connection to receive drop copies of        all executions. If the broker is also used as a service bureau        for the client's OMS and sends Tickets on behalf of the clients,        then this same connection will be used also for FIX connectivity        to the client.    -   Set up end-of-day file transfers from the system containing the        details of each trade, including the identity of the buy-side        customer for each trade.    -   Optionally, set up end-of-day file transfers to the broker's        clearing firm at end of day with the sell-side trade details.

The operator is further enabled to add or remove securities from thelist of securities supported for trading. The securities are preferablyassociated with parameter values specific to the present invention, suchas the Large Block Quantity and parameters utilized by the AnalyticsServer 160 to calculate the Block Price Range. An example of a set ofrequired fields for a security is given in the table below.

Description Type Security Name of the security String (optional blob)Symbol On the primary market Char[2, 3, 4, 5] Primary market NYSE,Nasdaq Enum LargeBlockQuantity Orders must be multiple of INT thisquantity MinBlockSpread Minimum number of cents INT between the blockbid and block offer MaxBlockSpread Maximum number of cents INT betweenthe block bid and block offer Beta Squashing parameter to FLOATrenormalize the Block Spread

System Operations.

The system in the preferred embodiment preferably comprises anoperations console used to provide centralized management of theservers, network hardware and trading. Operations software to supportrequired functions is commercially available in versions that minimallyprovide the following features:

-   -   Real-time Display of all server statistics    -   Problem Summary    -   Problem Resolution Feedback    -   Remote Management/Monitoring    -   Intelligent Notification System (Alerts)    -   Alert Display, Acknowledgement, and Annotation    -   Audible Alarm    -   Logging    -   Online Help

The operator console allows the system operators to execute thefollowing remote actions:

-   -   System Startup    -   System Restart    -   System Shutdown    -   System Component Restart    -   System Component Shutdown    -   System Component Startup    -   System Backup    -   Database Backup    -   Inner Day Startup/Shutdown    -   End-of-Day Reset    -   Execute End-of-Day Batch Processes

The system additionally enables the operations staff to generate theDaily Usage Reports at the end-of-day and extract from these thenecessary information for billing, research, clearing, and OATSreporting.

The operations staff preferably also uses a system operations tool tocreate a clearing summary, which contains a list of trades with thebroker IDs for both sides of the trade. Trading summaries pertinent to asponsoring broker and its clearing firm contain all trades where atleast the given broker sponsored one of the sides.

The system preferably also generates billing reports containing a listof all fills involving a sponsoring broker for sending to the broker.The fills should match intra-day execution reports one-to-one. Theend-of-day report additionally contains the client ID, which was maskedin the intraday reports. If both legs of a trade were sponsored by thesame broker, there will be two fill reports in the summary file.

The preferred embodiment saves two copies of the data described below toa removable medium for archiving and analysis. Wherever possible, thelogging of events includes a date-time stamp with millisecond accuracy.

-   -   System and Application Logs: The application and system logs on        each machine are labeled and saved. The Log is preferably reset        before begin-of-day.    -   Configuration Audit: The details of a begin-of-day and        end-of-day audit of the firmware configuration are recorded (NT        Registry, application Config, etc.).    -   ACT Messages: There shall be a separate log containing the        details for all ACT messages. This log is preferably reset        before begin-of-day.    -   Orders & Trades: The order and trade tables are copied to        removable storage at end-of-day. A separate log for the details        on order state transitions is maintained. Log and tables are        preferably reset before begin-of-day.    -   Operation Activities: The operator activities affecting the        behavior of the system are logged. The logging will be time        stamped and include the identity of the operator. This log is        preferably reset before begin-of-day.

All System Activity Logs and Daily Reports are preferably moved topermanent storage at the end of each trading day. System Activity Logscontain enough information to reconstruct the trading logic and pricingfor each order and trade event, including time stamps required toresolve pricing disputes.

The system is preferably configured to automatically recover services inthe event of an accidental failure, using processes based on theconsiderations below.

-   -   Loss of GUI. The GUI 20 is a required channel for Cloud9        Services. If Net Server 110 detects a loss of connectivity with        the client, in the preferred embodiment all orders are        automatically cancelled and the system generates an alert to        help desk personnel with the phone number of any trader with        canceled orders. The GUI 20 shows the order status as “cancel        pending”. On reconnecting, the order status is updated to        “canceled”. Traders can pull up a list of orders that were        canceled as a result of the connection failure and re-activate        these orders; the system will treat them as new orders and        process them accordingly. In an alternate embodiment, users are        enabled to select a configuration where their orders would not        be canceled on loss of connectivity with the GUI; in this        embodiment the user will call the Help Desk to cancel orders        when the connection cannot be recovered.    -   Loss of FIX. FIX connectivity loss preferably does not cause the        cancellation of orders, because FIX is not the channel through        which executable orders are managed. The operator must be        alerted upon loss of a FIX connection. Upon reconnecting, the        FIX client will re-synchronize with the server in accordance        with the FIX protocol requirements. In an alternate embodiment        FIX can be used to enter executable orders in the system and        said system supports a configuration enabling users to request        that their orders be automatically canceled upon loss of the FIX        connection.    -   Analytics server. If the Analytics Server 160 is out of service,        the system in the preferred embodiment will continue to function        but without the benefit of functions normally implemented by the        Facilitator such as new active symbol messages or Contras        Present messages. The GUI 20 will also fail to receive quote        updates and BPR update messages. If the Analytics Server 160        cannot be brought back on line swiftly, system operators have        instructions to place the system in an off-line state where it        rejects any further order entry, but does not cancel existing        orders. These solutions are described as an example of how a        trading system such as that in the present invention addresses        reliability issues, but other solutions will easily be        apprehended by those skilled in the art. For example, an        alternate approach is to consider the Analytics Server 160 as a        vital service and automatically take the system off line and        cancel all orders upon loss of service.    -   NetServer, Order Manager and Facilitator. These services are        closely related to vital functions of the trading system.        Failure of these services is therefore considered fatal in the        preferred embodiment; the operator will attempt to cancel all        orders in the execution engine, or these will be canceled        automatically when loss of connectivity is detected. The Cloud9        system automatically goes in an off-line state upon detecting        failure of any of these services.

The integrity of the system is constantly monitored by a SystemManagement Console, which runs continuously on an independent system.If, at any time during the trading day, the integrity of the systembecomes uncertain, the system automatically switches to an off-linemode. At this point all orders are cancelled. All further orders aredeclined until the system returns to a fully operational state.

System-Imposed Symbol Active Flag

In an alternate embodiment, the system automatically sets all watchedsecurities to an active state at announced times and maintains thesesymbols active for a 15-minute window. For example, the system may setall watched symbols to an active state at 11:50 and hold them activeuntil 12:05. This alternate embodiment with an active window helps focusthe attention of traders around a given time, and allows traders toparticipate who would not feel comfortable with placing the first orderthat causes the symbol to become active. It also helps traders managethe space on their workstation screens, by limiting the amount of timeduring which they are expected to dedicate space to the GUI 20. Finally,by utilizing a call window that has already become known to traders asassociated with block crosses thanks to the marketing presence of thePOSIT® matching system, this alternate embodiment can leverage the factthat traders are already used to seeking a block crossing opportunity atthis time and focus liquidity in Cloud9 for symbols where a plurality oftraders are watching the GUI 20.

Upon termination of the active window, a symbol's activity state revertsback to what it would have been based upon the description of thepreferred embodiment. Thus, if there are open or recently canceledorders in the system in a given symbol upon termination of said activewindow then said symbol will remain active; other symbols that have notseen order activity will revert to a “watched” status. As long as asymbol remains in an active status, traders can continually place neworders without this act causing the symbol to change activity state. Forvery liquid symbols, this can potentially lead to a symbol staying in anactive state through the end of the trading day. While in this mode, thesystem will focus traders in price by means of the contras presentflags, but there is no further need to focus in time.

Watched Symbol Flag

In an alternate embodiment, the system is as in the preferred embodimentbut additionally indicates to users when a symbol is being watched by atleast two traders. If the symbol is on their own watch list, they willsee when there is at least one other trader interested in the symbol.For example, the watched symbols that are on the trader's watch listappear in a gray-colored box 1020 on top of the user interface,similarly to the orange-colored active symbol flags 1005 andyellow-colored contras present flags 1010, as shown in FIG. 10.

The purpose is to provide the trader with conditioning information thatincreases the likelihood of a fill. The fill rate would be expected tobe higher when the symbol is watched since at least one trader will seethe symbol become active upon an order entry event.

Of course a trader who has a watched symbol on his or her own watch listcan always find out if there are one or two other traders watching inaddition to him, simply by removing the symbol from his watch list. Tomake the system more user-friendly, an alternate embodiment also showsthe trader in this case whether there is one other trader watching, ortwo other traders. This can be done by means of an asterix next to thewatched symbol name to indicate when there is only one other traderwatching.

In an alternate embodiment the system shows the user the number oftraders that have this symbol on their watch at any time.

In counting the number of traders that are watching a security, thesystem preferably looks for traders that are in fact able to see anactive symbol flag. In one embodiment this is implemented by countingonly GUIs that are not minimized and are not delectably hidden behindanother application. In another embodiment the GUI cannot be minimizedwithout leaving a residual alert mechanism. For example the minimizedbar in the tray at the bottom of the trader's screen will flash with theorange or yellow color when a new active symbol or contras presentmessage is received, and show the symbol associated with the most recentsuch message.

In yet another alternate embodiment, the number of traders that watchthis symbol is not displayed, but the trader can learn the number ofparties watching upon entering an order. In this alternate embodimentwhere the trader does not know if a symbol is watched until submittingan order, the trader can also check an “auto-cancel” box to request thathis order is automatically canceled if no other trader is watching thesymbol, since no one in that case would be able to see the active symbolflag and rates would be exceedingly low. In another alternate embodimentthe trader is enabled to select the minimum number of traders thatshould be watching, and if the actual number of watching traders is lesshave the order canceled automatically.

Alternate Embodiment with System-Generated Calls

A well-known problem with large block crossing systems is the lowprobability that a large buyer and large seller enter orders at the sametime. Much of the present invention is directed to solving this problemafter the first trader has entered an order; but it does not in itselfprovide guidance as to when this first participant should be mostencouraged to place an order.

In an alternate embodiment, the system operates as described above andalso generates system-generated “call” events that focus traders'interest at times when there is indication of both buy and sell interestin the security. In another alternate embodiment the active flags arenot sent and the call is the only time focusing event. The call ispreferably scheduled via an algorithm that determines when thelikelihood of a fill is highest. It preferably does not utilizeunbalanced trade information (such as revealing the existence of buyinterest in absence of any seller), so as to avoid the perception ofinformation leaks whereby traders would feel that the orders they haveplaced in the system are causing unwanted information events beyondtheir direct control.

The purpose of the call is to attract order entry from traders when thelikelihood of a fill is greatest. For example, if the average fill ratefor a first trader placing an order in a given security were 5%, thefill rate when a call is open in the security might be 10% or 15%; incontrast the fill rate when there is no call would be lower than 5%;with an overall average of 5% for a trader that places orders at randomtimes independently of any calls.

Minimally, the system will generate calls to focus order entry in asecurity when traders are missing each other on both sides. Otheropportunities for generating calls are outlined below. To avoidinformation leak issues, these calls will be reported together with theBPR updates rather than together with an order entry event. In analternate embodiment they are issued on the half hour, to furtherincrease the traders' focus.

Description Type Symbol Primary market CHAR[5] name for the securityTimeStamp When the BPR was HHMMSSCC calculated QuoteTime Time of lastquote HHMMSSCC update prior to calculating the BPR LastSaleTime Time ofmost recent HHMMSSCC tape print prior to calculating the BPR NationalBidIn whole cents FLOAT.2 NationalOffer In whole cents FLOAT.2 BlockBid Inwhole cents FLOAT.2 BlockOffer In whole cents FLOAT.2 Call ON/OFFBoolean

The algorithms to generate calls are preferably based upon the followingprinciples,

-   -   Not triggered on order entry. Calls will be timed with BPR        updates. This eliminates the fear of information leaks that        would occur if a trader were to see his own order immediately        cause a call.    -   1 Minute Minimum lifespan. Once a call has been initiated, it        will stay open for a sufficient time to let traders react and        respond to the call.    -   Two-sided. Calls will be issued only if there is evidence of        block interest on both sides. This reduces potential gaming.    -   Not necessarily an order. Calls may be generated when there is        no active order in the system. This again reduces gaming        problems.    -   Undisclosed rules. Again, reduces gaming issues. Also allows the        algorithm to be updated (within the context of the above rules),        and tune it to maintain a reasonable frequency of calls.

The following data is preferably available for the purpose of decidingwhen calls should be generated.

-   -   Tickets with remaining quantity.    -   Open orders.    -   Expired orders.    -   Trades.    -   Block prints on the tape.    -   Repeated prints on the tape with unusually high volume.        Rules-Based Method for Issuing Calls.

A first alternate embodiment utilizes a rules-based approach fordeciding when the call should be issued. The Activity Evaluation processis executed together with the BPR Update process, for each symbol.

If there isn't already a call, the rules given below are preferablyapplied to decide if a symbol should be called depending on activity inthe system (orders, trades, etc.) and on the market. If any of theBoolean rules are true, the symbol will be called.

If a symbol is already called, has been called for at least <60> seconds(configurable global parameter), and there is no contras present flag inthe security, the system preferably removes the call.

Rules that lead to a call are listed in the bullet points below.

-   -   An order was entered and has expired. Later, another order is        entered on the contra side. At the next BPR refresh time, check        whether a call has been posted in this symbol in the last 30        minutes (configurable ActiveMaxDelay1), and if not, post the        call in this symbol together with the new BPR.    -   An order was entered and has expired. Later, a block print is        detected on the tape (greater than 10000 shares or $250,000,        again these are all configurable parameters), and the call has        not been posted in the last 90 minutes in this symbol        (configurable ActiveMaxDelay2).    -   Discretionary: a help desk operator types the symbol and clicks        on a button.    -   An order was entered and a ticket exists on the contra side.    -   An order was entered in a symbol that has traded within the last        <30> minutes.    -   A resident order is priced passively and a new order has arrived        within the BPR.    -   A resident sell order is within the BPR and repeated prints are        detected on the tape indicating aggregate buys at the offer for        a block size.

The above list is intended for illustration and is not intended to beexhaustive. Other rules that could be used to identify when there is agreater likelihood of a trade will easily be apprehended by thoseskilled in the art.

Score Function Method for Issuing Calls.

Another alternate embodiment with calls utilizes a score function todetermine when to generate a call, as described next.

The Call Evaluation process is executed together with the BPR Updateprocess, per symbol. If there is not currently a call in this symbol,the system calculates both an activity score and threshold for thesymbol, as described below. If the score exceeds the threshold, thesystem preferably generates a call for this symbol.

If a symbol is already called, has been called for at least <60> seconds(configurable global parameter), and there is no contras present flag inthe security, the system preferably removes the call.

The system preferably calculates the score function via two steps.

Step 1: compute the Buyside Interest and Sellside Interest in thesecurity by adding weights associated with the following conditions.

-   -   OpenOrderCondition. Buy (sell) order currently open and priced        within the BPR.    -   PassiveOrderCondition. Buy (sell) order currently open but        priced more passive than the BPR.    -   ExpiredOrderCondition. Buy (sell) order expired since symbol was        last active.    -   TicketCondition. Buy (sell) ticket with remaining quantity.    -   BlockTapeCondition. Large Block Fill on Cloud9 since symbol was        last active.    -   MarketPrintCondition. Block print on the tape for at least        <BlockQty=10000> shares or <BlockValue=$250,000>, printed above        (below) the midpoint, having taken place since the last BPR        update.    -   RandomRefreshCondition. Repeated prints above (below) the        midpoint since the last BPR update with total quantity above        <BlockQty=10000> shares or <BlockValue=$250,000>, at a rate that        exceeds <LiquidityRatio=2> times the average volume for the        security    -   WatchListCount. Number of traders that have this symbol on their        watch lists.

The table below gives an example of a reasonable configuration for theweights.

Description Weight OpenOrderCondition Order within BPR 20PassiveOrderCondition Passive order 10 ExpiredOrderCondition Expiredorder 5 TicketCondition Ticket 4 BlockTapeCondition Cloud9 trade 3MarketPrintCondition Big print on the tape 2 RandomRefreshCondition Buy(sell) pressure on the 1 market WatchListCount Number of traders withINT this symbol on watch.

Step 2: Compute the symbol activity score as the product of the BuysideInterest times the SellSide Interest.

The system preferably calculates the threshold as follows. The thresholdis equal to zero if the symbol has never been called. If the symbol haspreviously been called, the threshold for this symbol will be equal toan exponential function of the time since the last call expired in thissymbol:Threshold=MaxThreshold*EXP(−Beta*TimeDelay)

The parameters MaxThreshold and Beta are preferably configurable persecurity.

Alternate Embodiment with Targeted Active Symbol Messages

In an alternate embodiment, the system operates as described aboveexcept that the active symbol message is not sent to all traders whohave placed the symbol on their watch list; instead, the flag is onlysent to traders that have provided certified trading interestinformation indicating a likely interest in either buying or selling alarge block of this security. For example, such certified tradinginterest information may be a drop copy of execution reports thatbrokers issue following each trade, and the selection criteria may bethat the firm has bought net (or sold net) at least 10,000 shares ofstock within the last 30 minutes. Other examples are describedextensively in the following co-pending U.S. patent application Ser. No.09/585,049, filed Jun. 1, 2000; Ser. No. 09/750,768, filed Dec. 29,2000; and Ser. No. 09/870,845, filed May 31, 2001, the entire contentsof each of which are incorporated herein by reference.

Alternate Embodiment with a System-Imposed Match Price

In the preferred embodiment described above, the traders themselves setprice conditions on their order that will determine the execution pricewith no further intervention on their part.

In their current workflow, Institutional traders are accustomed tosending market orders to brokers and accepting or rejecting prices thatthe broker may propose for executing a large block. In this sense, onecould say that the Institutional trader is a price “taker,” not a price“maker.”

Electronic trading systems suffer from the problem that the first partyentering an order is writing the price that others may elect to take ornot take; thus leading to an adverse selection problem where theirprices will tend to get taken when they committed a mistake and offereda too aggressive price. Attempts to reverse price priority by giving thestanding order improvement to the second order's limit, or having thetwo meet half way if the prices cross, don't work well because suchrules only cause the second order to start with a passive order and thenprogressively increase price aggression until a match occurs at thestanding order's limit.

The purpose of the alternate embodiment described below is to solve thisproblem by having the system generate a proposed match price that is notsensitive to the prices of existing orders in the system.

In this alternate embodiment of the present invention, the systemperforms as described above for limit orders and pegged orders, hutadditionally enables traders to enter a new order type that we willrefer to herein as a “Market Order”. A market order may optionally alsohave an absolute limit price, which in turn may be fixed or pegged to amarket indicator such as the midpoint of the National Best Bid of Offer.

An incoming market order will be handled as follows.

Upon receiving a market order, if there is no contra order currentlyresiding within the system, it simply stores the market order. If thereis a resident contra order, the system will randomly determine apossible trade price by choosing a price within the BPR with astatistical distribution, such as, for example, a flat distribution (theflat distribution being that wherein all price points within the BPR areequally likely to be selected). In another example, the proposed tradeprice is sensitive to orders in the system, and the users submit to fairarbitration by allowing the system to use order information to determinea fair price. For example, such an embodiment can generate a randomprice based on a distribution that is not flat but piecewise flat, withtwo flat segments above and below the BPR Midpoint, to give greaterprobabilities to the prices below the BPR midpoint when there are moresell orders than buy orders in the system, or vice versa if there aremore buyers. For example, the probability of prices below the BPRMidpoint can be taken to be equal to P (Below Midpoint)=1/(1+EXP(GammaX)), where Gamma is a positive number such as 2, and X is the relativedifference between buyer shares and seller shares priced within the BPR:X=(BuyQuantity−SellQuantity)/(BuyQuantity+SellQuantity). Thus, X→1 ifthere is more buy interest than sell interest, and X→−1 in the oppositecase. These examples of methods to generate prices are intended for thepurpose of illustration and not as an exhaustive list; other mechanismsto generate a price can easily be apprehended by those skilled in theart.

Having determined a possible trade price, the system will proceed todetermine the feasibility of a trade at this price according to thefollowing logic.

-   -   1. If the randomly generated price is within the limits of both        orders, the trade is executed at this price with no further        input needed from either player.    -   2. If neither order is able to accept the proposed        randomly-generated price, this price is proposed to both        traders, who are then given a time window in which to accept or        decline the price. For example, the time window can be        synchronous with the BPR refresh time, or a minimum of 15        seconds, whichever is longer. At the expiration of this time        window a new randomly-generated price is produced together with        a new BPR, and this process continues as long as there are        orders on both sides within the BPR.    -   3. If one order's limit price is sufficiently aggressive to        accept the proposed trade price but the other is not, the price        of the order that was not sufficiently aggressive to trade will        be proposed to the more aggressive trader, and the        randomly-generated price will be shown to the less aggressive        trader. Neither trader will know whether the price they are        looking at is the other trader's limit or the randomly generated        system price. At the expiration of a time window, anew price is        generated and the process continues as described as long as        there are orders on both sides within the BPR.

In an alternate embodiment, when only one trader's limit overlaps thesystem-generated price, this trader has the option of accepting theother's limit or of proposing a counter offer to the less aggressivetrader. In this embodiment, the less aggressive trader does not see aprice until the first trader has taken action, or a 30-second timewindow expires. The more aggressive trader may cancel his order withinthis 30-second window without having at any point revealed its existenceto the other trader. If the first trader takes no action, the systemautomatically shows the second and less aggressive trader thesystem-generated price after 30 seconds. This delay overrides theimmediate display of a contras present flag to resident orders of thepreferred embodiment.

Competition Present Flag

In an alternate embodiment of the present invention, the system performsas in the preferred embodiment but in addition provides a mechanism fortraders to know when there is competition to buy (sell) the security,enticing them to increase their price aggression and thereby alsofacilitating the process of discovering a fair price for a trade.

In a first alternate embodiment with the competition present flag, thesystem simply lets each trader with an order in the system that isalready seeing a contra present flag know whether there are other orderson the same side.

In a second alternate embodiment with the competition present flag, thesystem performs as in the first alternate embodiment just described, butadditionally the trader with the lower matching priority based price andtime priority ranking is enabled to see that the other trader has ahigher matching priority; this trader is then induced to increase theprice aggression on his order. If this becomes the new highest matchingpriority order, the other trader will in turn be allowed to see that hisprice is no longer the best. This process continues as long as there aremultiple orders on the same side in a context and one or more contrasare present.

Working Orders and Integration with Third Party Execution Systems

In an alternate embodiment, the system operates as described above butadditionally users are enabled to request that their orders be worked onthe market while waiting for a match within Cloud9.

Users that request a working order option are preferably required toenter an order quantity that is greater than the minimum block quantity.The additional size will be dispatched to be worked by an automatedprocess that automatically places small slices on the regular market, inthe manner known in the art as “random refresh” orders. Several suchautomated processes are available on the market today; some that areknown in the art are random refresh algorithms that place a smallquantity of shares at the best price on the market, and whenever saidsmall quantity is exhausted, generates a new small order to be placed atthe new best price. The refreshed quantity is chosen at random between aminimum and maximum size, for example between 500 and 900 shares. Inanother example the order is refreshed after a random delay of a fewseconds. Other more sophisticated algorithms are commercially availableto automate the execution of an order through its reduction to smallpieces that are executed independently, such as ITG's Quantex. Otherdestinations, such as NyFIX Millennium, enable completely hidden ordersto intercept order flow that was on its way to a third marketdestination.

The alternate embodiment described herein manages the order across oneor more working order destinations in addition to Cloud9. In one versionof this embodiment the system splits the order into several chunks, onefor the Large Block Quantity is placed on Cloud9; others for asystem-configurable quantity (for example, 5000 shares) are routed toexternal destinations that have the capability of working the order.Whenever a destination has completed its block, the system determines ifthere is residual quantity besides that which is already placed onexecution systems, and if so sends the lesser of the system-configurablequantity or the available residue to the destination that has completedits block. When one external destination has completed a chunk and noresidual quantity remains, but there are still incomplete blocks onother market destinations, the incomplete block that has spent thelongest amount of time without receiving a fill is canceled andre-routed to the destination that reports having completed its block.When there are no further incomplete blocks anywhere except for theLarge Block Quantity order on Cloud9; the system sends a message to theuser's GUI 20 to notify that the working order component has beencompleted. The trader may then place additional shares to resume workingthe order, or convert the Large Block Quantity itself into a workingorder.

In this alternate embodiment, the system preferably removes the orderfrom consideration in assigning flags when the quantity remaining inCloud9 has dropped below the Large Block Quantity. In another alternateembodiment, the remaining size in Cloud9 can fall below the Large BlockQuantity and maintain the order's effect to keep the active symbol flag.In this embodiment, a second party that has also selected the workingorder option may receive a partial fill against this Cloud9 order if theprices were to cross (for example, if one order is pegged to the NBBOMidpoint and the other is a Limit Order). If the Cloud9 Limit prices oftwo working orders cross, the system preferably attempts to pull backall orders routed to third party destinations, to maximize the size thatcan be traded internally. Residues from this match event aresubsequently reassigned to external destinations. In yet anotheralternate embodiment, any trader may check a box to specify that theyare willing to receive partial fills from the residue on a workingorder, and may optionally specify a minimum quantity that such fillsmust satisfy.

In another alternate embodiment the orders entered within the system areplaced in the execution engine in a suspended status while the liableblock order is placed at a destination where a fill might be expected.For example, the block can be placed on POSIT® for a scheduled crosswhile it remains in a suspended status on Cloud9. The system preferablymaintains the effects of the suspended order on Cloud9 for purposes ofthe active symbol flags. Upon entry of a contra order, the system ofthis alternate embodiment preferably pulls back the liability byattempting to cancel the externalized order. When this cancel issuccessful (the order has not already been filled); the contras presentflags are sent as in the preferred embodiment.

While the embodiments shown and described herein are fully capable ofachieving the objects of the subject invention, it is evident thatnumerous alternatives, modifications, and variations will be apparent tothose skilled in the art in light of the foregoing description. Thesealternatives, modifications, and variations are within the scope of thesubject invention, and it is to be understood that the embodimentsdescribed herein are shown only for the purpose of illustration and notfor the purpose of limitation.

What is claimed is:
 1. A method for operating an electronic, automatedcrossing system for facilitating trading of securities over acommunications network comprising the steps of: at said crossing system,electronically receiving via the communications network a firstconfidential buy or sell order for a security from a first tradercomputer; at said crossing system, receiving via the communicationsnetwork, data for the security including current market prices,volatility and liquidity; by said crossing system, automaticallycalculating a block price range for said security, said block pricerange having an upper end and a lower end, said block price range beingcalculated based on the current market prices, recent volatility in thesymbol, and liquidity by said crossing system, automatically determiningthat said first order has a price that is reasonably priced when for asell order, said price is equal to or lower than said upper end of saidblock price range, or for a buy order, said price is equal to or higherthan said lower end of said block price range; by said crossing system,automatically transmitting to a second trader computer an electronicnotification that a reasonably priced order for said security ispresent, but without a notification of the side of the order; at saidcrossing system, electronically receiving a second confidential orderfrom said second trader computer, wherein said second order is a contrato said first order and said second order nearly matches but does notcross said first order; by said crossing system, automaticallytransmitting an electronic contra order notification via saidcommunication network to said second trader computer after said secondorder is received so as to cause the display of the contra ordernotification graphically on a graphical user interface of said secondtrader along with an indication that a nearly matching contra order isactive within the system; at said crossing system, electronicallyreceiving a third confidential order from said second trader computer,said third order being a contra to said first order and crossing saidfirst order; and by said crossing system, automatically executing atrade comprising said first order and said third order; wherein saidcrossing system causes said second trader computer to display saidcontra order notification indicating that a nearly matching contra orderis active within the system only after a predetermined time period haslapsed after said second order is received.
 2. A method as in claim 1,wherein said crossing system causes said second trader computer todisplay said indication that a nearly matching contra order is activewithin the system, only after a predetermined time period has lapsedafter said second order is received.
 3. A method as in claim 1, whereinsaid crossing system causes said second trader computer to display saidindication that a nearly matching contra order is active within thesystem immediately after said second order is received.
 4. A method asin claim 1, wherein said step of calculating a block price range isbased on recent or current market prices.
 5. A method as in claim 1,wherein said step of calculating a block price range is based on recentvolatility in said security.
 6. A method as in claim 1, wherein saidstep of calculating a block price range comprises predicting a pricerange likely to occur within a first predetermined time period.
 7. Amethod as in claim 1, wherein said block price range is recalculated atintervals of time approximately equal to said first predetermined timeperiod.